Daily Commentary BY THE CURVE TEAM –

Interest Rates On The Move

2nd of February, 2018

As equity markets experienced another volatile night and the USD struggles to gain a solid footing, the global move in bond markets continued. While yields where higher across most major developed economies, the Australia bond market continues to tread water for now.

The 30 year bull market in bond is looks to be definitively over as US 10 year yields continued to surge higher overnight and are now sitting just below 2.80%. There is a real chance that it will test the late 2013 highs just above 3.00% in the near future and it could have implications for a number of markets, including ours.

Higher long term rates, especially in the US, where most mortgages are fixed off long term rates, will have obvious consequences for businesses and households. It is also likely to play havoc with valuations in other assets such as equities, and could also result in some rotation back towards bonds.

The rise in global bond yields could also have implications for our own market. While long bond yields have been rising in the US, UK and across Europe, Australia’s long bond rates have yet to really join in on the move.

Over the past two weeks, US 10s have broken their post 2016 election highs and added a further 15bp, to be sitting at 2.79%. Over the same period, our 10 year government bond rate has drifted sideways in a fairly tight range and sits at 2.84% this morning.

Why is this important? The yield spread and the AUD have had a close relationship over the years.

David Flanagan

Director - Interest Rate Markets