Commentary courtesy of Spectrum Asset Management’s Lindsay Skardoon.
| Close | Prev Close |
Change | |
| Aust. 90 day bank bill% | 1.99 | 1.98 | 0.01 |
| Aust. 3 year bond%* | 2.22 | 2.18 | 0.04 |
| Aust. 10 year bond%* | 2.72 | 2.72 | 0.00 |
| Aust. 20 year bond%* | 3.10 | 3.11 | -0.01 |
| U.S. 2 year bond% | 2.27 | 2.30 | -0.03 |
| U.S. 10 year bond% | 2.82 | 2.88 | -0.06 |
| U.S. 30 year bond% | 3.06 | 3.11 | -0.05 |
| * Implied yields from June 2018 futures | |||
LOCAL MARKETS
Bonds should rally on the day as bond markets were strong in both the U.S. and Europe. Short term rates look likely to continue to widen as borrowing costs in the U.S. remain high and because the Australian banks fund offshore. As rates climb the Aussie banks will have to attract more deposits and this will push short term rates even higher. Foreign investors which own in excess of 50% of the local bonds are squeezing the market creating distortions. Bonds are being lent by increasing volumes of repos suggesting that liquidity is being drained from the system with the net effect that short-term funding rates have increased. This trend is likely to continue.
U.S. BOND MARKETS
The bond traders had a great day today if you were long. The day was very much a risk off day and bonds seized the opportunity in the confusion and rallied. Bonds will look to post further gains during this period of uncertainty.
The other welcome news in part for the bond market was that an agreement was made to fund the debt ceiling into September. This helped the markets however at some time the deficit and increased issuance may sour the attractiveness of bonds.
