Commentary courtesy of Spectrum Asset Management’s Lindsay Skardoon.
| Close | Prev Close |
Change | |
| Aust. 90 day bank bill% | 1.80 | 1.79 | 0.01 |
| Aust. 3 year bond%* | 2.08 | 2.11 | -0.03 |
| Aust. 10 year bond%* | 2.74 | 2.80 | -0.06 |
| Aust. 20 year bond%* | 3.17 | 3.22 | -0.05 |
| U.S. 2 year bond% | 2.21 | 2.24 | -0.03 |
| U.S. 10 year bond% | 2.80 | 2.86 | -0.06 |
| U.S. 30 year bond% | 3.09 | 3.13 | -0.04 |
| * Implied yields from Mar 2018 futures | |||
LOCAL MARKETS
Bonds are likely to have a better day today. Bonds look likely to follow the lead from offshore and continue the rally. With a trade war looming, Australia looks to be in a good space compared to the U.S. and as such bonds can probably rally or at least hold current levels until there is new information to challenge the direction.
U.S. BOND MARKETS
Trump in one fell move has sought to impose tariffs on steel and aluminium thus setting in train a chain of events that will most likely have a significant impact on markets and certainly markets in the U.S. Bonds won’t be a safe haven. There is now too much at stake. The Chinese may well decide to impose an investment embargo on the U.S. and such a move would be a major hazard for U.S. treasuries. China recently was the major investor in the 7 -year auction and has been a massive buyer of U.S. treasuries. Should China step aside like the Japanese have already done then the challenge will be to find investors at current levels.
Yes, bonds can rally for a little while however the real challenge will be to find buyers as the ECB, Fed and SNB all slow their purchases or start to sell their holdings. Combine that with a rising deficit and probably a widening trade deficit then the U.S. bond market starts to look not quite the AAA rated economy one thought they were investing in.
Sure, bonds rallied following Powell’s comments today that the economy was not overheating but to meet budget needs, the economy has to grow in excess of 3% and at excess employment this is an extremely ambitious goal. Bond investors will one day think about this but for the moment the hint of a slowing economy caused bond traders to do what they should do and that was to buy.
