Daily Commentary BY THE CURVE TEAM –

Daily Insights – Inflation Uncertainty

28th of September, 2021

US 10 Years Pushing Higher

  • The yield is up to 1.49%.
  • Fed tapering is expected later this year, which is fuelling the increase.
  • For some time, markets have been pricing in cash rate rises sooner than central bank forecasts. As inflation persists, it is looking more likely that cash rate rises across the developed world could begin next year.

Is Inflation Transitory?

  • Supply side forces are clearly having a major influence on current prices, with numerous examples, such as oil prices, shipping costs and labour shortages across the world.
  • At some point, many of these forces will abate, and if central banks increase interest rates when prices are rising for supply reasons then there is a risk of stagflation.
  • The demand side, which central banks are more effectively able to rein in, should also have reduced pressure as fiscal stimulus falls (and when central banks increase cash rates).
  • The intersection between the supply side and demand side remains the key. Namely, labour shortages that were not evident prior to covid, mean it is more likely businesses will increase wages sooner than pre covid.
  • A lack of labour supply will be a major factor in higher wages, and the higher wages will be the motivation for central banks increasing the cash rate.

Bond Opportunities

  • Increases in US bond yields seems to be translating to the Australian market.
  • NAB’s recent 5-year bond issue, which matures in August 2026 has been trading at par or a slight discount.
  • It issued at +41 and has been available at +41 or slightly higher.
  • Usually, primary issues come on to the secondary market at a slightly lower yield than their issue margin.
  • This could foreshadow more opportunities in bonds. Investors will need to decide whether to invest in the primary issue or wait for interest rates to rise and try to purchase them at a discount on the secondary market.

Josh Stewart

Associate - Money Markets