With global bond yields continuing to fall the Australian bond yield could be below 2% in the next week or so. It was heading that way yesterday and overnight.
German 10-year bond yields overnight, joined those in Japan in turning negative. That means Germans and others holding bonds (and Japanese) are paying the government for the privilege.
US bond yields fell to lows not seen since late 2012 overnight at around 1.58% for the 10 year security and the finished at 1.61%.
German 10-year bunds fell to minus 0.028% for the first time ever (after the average yield across all German government bonds turned negative last week), and Japanese bond yields continued to fall deeper into the red (minus 0.18% yesterday). UK gilts fell sharply last night to a new all time low of 1.146% – last Friday it was 1.22%.
That tells us there are some very scared big investors out there.
The Australian 10-year bond rate fell to a new all time low of 2.04% yesterday after touching 2.06% on Monday. It is following yields on US, German, Japanese and UK 10 year bonds lower as investors seek safe havens ahead of the Fed meeting which started overnight and the looming UK vote on whether to leave the EU.
The sustained fall of bond yields to record lows globally is seeing flows into bond markets still offering relatively high yields like Australian bonds which in turn drives yields lower.
The yield on our 10-year security has fallen 0.25% in the past month alone and nearly 1%% in the past year according to Bloomberg data – that is a larger fall than the 0.75% reduction in the cash rate in the past 13 months.
This plus the Fed’s on off approach to monetary policy has helped push US treasury yields to their lowest levels since February, and the German Bund, Japanese 10 year bonds, and UK Gilts to new record lows.
Those fears about Brexit in particular saw our stockmarket sell off heavily yesterday with an estimated $27 billion in value shed as the ASX 200 fell by more than 100 points in the biggest fall for four months.
Other markets across Asia also sold off for a second day. Measures of market fear and concerns are now at the highest level since the GFC (and worse than during the euros crises).
Markets in Europe and the US also fell overnight. Our market will start down 16 points, according to the ASX 200 futures market.
The UK pound is also weakening as it looks like the country will vote on June 23 to leave the EU – a move that will trigger weeks of market turmoil.
The US dollar is also rising – the Aussie dollar has eased since its run up above 75 US cents last week and is now back under 74 cents. Oil prices dipped after breaching $US50 a barrel last week. The US price is now under $US49 a barrel
Gold is back having a run on the growing uncertainty (around $US1,288 an ounce), but other metal prices are weak to mixed with copper selling off to fall closer to its 2016 lows of January
The AMP’s chief economist, Dr Shane Oliver says that in Australia, the slide in the cash rate is also impacting.
“Since the ten year bond yield reflects investor expectations of the average cash rate over the next ten years (along with compensation for locking your money away over time) and since such expectations tend to extrapolate current conditions off into the future the longer the cash rate stays low or falls further the greater the risk the bond yield will push into new record low territory catching down to bond yields in the US and much lower yields in Germany and Japan,” he wrote at the weekend.
Of the two big decisions – the Fed rate rise timing is the lesser of the two evils, so to speak. Markets do not expect one this week and say July or September will be more likely.
But if the UK votes to leave the EU, then the timing will be very much uncertain, especially if it sparks a sell-off in the pound and UK markets.
Dr Oliver says that "with Brexit polls now showing a swing in favour of a Leave vote, investment markets are starting to focus more on the risks around Brexit and the threat this poses to the British economy (with the British pound falling 1.4% on Friday) and to renewed worries about the stability of the Eurozone.”
"All of which is seeing a flight to safety pushing bond yields down and the $US up. My view remains that undecided voters will stick with the status quo in the Brexit vote much as we saw in the Scottish referendum, but it’s a very close call,” he said.
