Commentary courtesy of Spectrum Asset Management’s Lindsay Skardoon.
| Close | Prev Close |
Change | |
| Aust. 90 day bank bill% | 1.81 | 1.80 | 0.01 |
| Aust. 3 year bond%* | 2.07 | 2.08 | -0.01 |
| Aust. 10 year bond%* | 2.72 | 2.74 | -0.02 |
| Aust. 20 year bond%* | 3.14 | 3.17 | -0.03 |
| U.S. 2 year bond% | 2.24 | 2.21 | 0.03 |
| U.S. 10 year bond% | 2.86 | 2.81 | 0.05 |
| U.S. 30 year bond% | 3.14 | 3.08 | 0.06 |
| * Implied yields from Mar 2018 futures | |||
LOCAL MARKETS
The selloff in bonds is likely to continue. The Aussie bonds will remain vulnerable until details of how the tariffs in the U.S. will affect Australia. For the moment bonds could back up a little. The nexus between Australian bonds and U.S. Treasuries may be starting to break down.
U.S. BOND MARKETS
Markets now will become more obsessed with earnings and that’s a good sign. A slow down will eventually cause a bond tantrum and until then markets are likely to remain choppy. The year 2017 was most likely the final year of easy money. All of a sudden volatility has returned, albeit at the margins and markets are already stressing. It will be interesting to see what happens over time.
If GDP growth does not hit the target of 3%, bonds will be sold. And if that is not enough bonds can also be used to retaliate against tariffs. The U.S is a massive debtor nation. Its ability to finance Government is dependent upon a number of countries financing its government through purchasing bonds. China a country that owns about $1.2 tr and about 10% of the U.S.’s outstanding debt could decide not to reinvest their trade dollars. At the end of 2017 foreign governments owned about $4.03 tr or nearly 29% of the $14.47 tr in treasury securities outstanding. A mere change of attitude could see treasuries sold heavily. Some would argue that this would also affect investments that are held without gaining concessions. But then that becomes an argument based on pain. Could the U.S. Economy withstand an economy with a bond rate at 5%, an inflation rate of 3%, and the Fed tightening? China could certainly take a hit on its holdings and in many ways so what if $300 bio is initially lost when the reinvestment opportunities could be far greater and a Government far more dependent on foreign investment to rekindle a fallen economy.
