Daily Commentary BY THE CURVE TEAM –

Rates Markets Drive Equity Markets

15th October 2018

The US equity market has been outperforming since January 2016. Healthy corrections have been occurring on a regular basis as the gradient cannot sustain a near vertical trajectory. A secular bull market is one where the dips are so shallow it barely offers any re-entry points as its surges forwards. This correction is indeed a healthy one triggered by an interest rate recalibration as US 10 Yr Treasuries made a substantial shift from 3.05% to 3.25% ahead of a heavy auction issuance program.

There was a scheduled auction program of 3, 10 and 30 Yr Treasuries in volumes of $36b, $23b and $15b last week on 9th, 10th & 11th October.

The market positioned itself for this supply by the US Treasury at a time when the Federal Reserve was also not a buyer and actually a seller as well.

This facet of Quantitative Tightening has significant issues for global liquidity and other asset markets have no doubt felt the effects.

Interest rates in Australia continue to demonstrate exactly what the RBA is looking for and that is financial stability. The 5 yr swap remains within a disciplined 18 bpts range over the last month and only a 30 bpts range over 3 months. There has been nothing that represents any violent readjustment in the Australian interest rate curve thus far.

Australia’s spread to US rates peaked last Monday. Since then we have narrowed the gap by 7, 5 & 6 bpts in 2 Yr, 5 Yr & 10 Yrs to current levels of 80 bpts, 76 bpts and 41 bpts below US rates.

AOFM will next Monday release $13b of funds into the system to all the current holders of the ACGB 21/10/2018.

Peter Sheahan

Director - Institutional Markets