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Friday, 4 January 2019

Bond yields driven lower

Yields slip

The Reserve Bank's latest chart packs suggested that there's no sign of underlying inflation getting close back to the implied target of 2½ per cent any time soon. 

Heck, even 2 per cent underlying inflation doesn't look very likely any time soon, with fuel prices now tumbling to 15-month lows. 

There's been a a bit of interesting (albeit somewhat predictable) tug-of-war played out partly in the media over recent days, with the Treasurer demanding that banks open their loan books, and bank execs bemoaning that regulation is preventing them from processing loans more quickly. 

The squeeze is beginning to make markets edgy and investors are becoming increasingly risk-averse, and this looks set to be a key theme for 2019 as the Royal Commission winds up towards the end of this month. 

Rate cuts back on the table...again?

There was plenty of justifiable excitement about a currency 'flash crash' yesterday, with much speculation about the possible causes. 

Stepping back from the noise, the Aussie dollar has fallen from above 81 US cents early last year to about 70 cents amidst trade tensions and concerns about global growth. 

The ASX is still helpfully, if optimistically, providing its daily updates on imminent rate hike expectations (which is to say, there aren't any). 

Financial markets have long since moved on, and Australian bond yields have been plunging.

The 10-year is now at the lowest level since 2016, and at one stage yesterday the 3-year bond yield traded at just 1.63 per cent, which is only 13 basis points above the Reserve Bank's cash rate. 

The 10-year bond yield has fallen by 75 basis points since May. 

As you can see markets aren't seriously contemplating a recession at this stage - Australia  has strong population growth and its floating currency has continued to be effective in staving off a contracting economy - but this isn't exactly a vote of confidence either.

As for rate hikes, markets have decided that you can pretty much forget those, with the cash rate futures implied yield curve inverted all the way through 2019, and for the first half of 2020 as well. 

One of the key themes in 2018 was rising interest rates in the US - with some moderate implications for funding costs here - but forward spreads are now pricing in monetary policy easing over there too for the first time in a decade.

From falling house prices and plunging stock markets, to rapidly falling yields and now a crunching of the Aussie dollar (to the lowest level since the global financial crisis),  populist bank-bashing has - through one mechanism or another - made most people worse off.

It has made for some good fodder for journalists, though.


ADP payrolls came in strong in the US at +271,000, so the labo(u)r market is clearly still in good nick; however the ISM manufacturing the index posted its biggest monthly decline since 2008 and stock markets are getting another whack.