Chart of the Day: Aussie bonds

bullbear

by Chris Becker

Today’s chart is actually a 4 in 1 and carries on from last week’s expose on Australia’s sovereign bond yield lows.

From Bloomberg:

bonds

 

Here are the cliff (or is that Michael) notes from Bloomie and my take thereafter:

Chart 1: Australian 10-year yield premium to AAA peers. Ten-year bonds offer 1.6 percentage points of extra yield over comparable securities.

This is still a considerable yield and the carry trade still explains why a country with higher unemployment than the US, low GDP growth while facing a massive headwind as the mining boom unwinds should have a currency at least 20-25% lower, but doesn’t. Rates differentials matter

Chart 2: Inflows from Japanese investors. Japanese money managers have purchased Australian bonds for 13 straight months. It’s the longest run since 2010, based on Japan’s Ministry of Finance data that go back to 2005.

Japanese purchasing comprises about 6-7% of all foreign buying, which by the way comprises over 70% of destination of Aussie bonds. The locals aren’t interested, preferring to take literal punts on local stocks.

Chart 3: Yields signal expectation for rate cut. Five-year notes yielded 2.24, or 26 basis points less than the central bank’s target for overnight lending, or the cash rate. The inversion signals investors are buying debt to lock in yields now in case they fall later.

This is the first clue to an outlook that screams lower rates and lower growth.

Chart 4: Inflation outlook falls. Five-year inflation swaps, which allow investors to exchange fixed interest rates for returns equivalent to the consumer price index, dropped to 2.23 percent this month. It was the lowest level since the global financial crisis triggered a contraction in the world economy in 2009.

The clincher. Contrary to mad economist opinion, the RBA is not raising rates anytime soon as inflation, both tradeable and non-tradeable, is not a concern. There are no wage breakouts to speak of as the income recession rolls on and households continue to disleverage with debt servicing ratios falling as house prices rise.

Is this a beautiful deleveraging as Ray Dalio calls the US post-GFC economic restructure or are there a few air pockets to come? Buckle up.

 

 

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Comments

  1. For small investors like me with amounts that can be keep under the $250,000 government guarantee threshold by using accounts at a few different banks then 5 year term deposits at around 4% appear a no brainer over 5 year AAA bonds.

    The remainder of this comment has nothing to do with the current topic but the thread it relates to has been closed off. Perhaps it will be of interest to others like me who didn’t know the meaning of the slang terms ‘sock-puppet’ and ‘astroturfer’.

    I’d like to correct the insulting inference Revert2Mean drew from bingobob’s fraudulent comment, in which he pretended to be me, on yesterday’s “It’s Getting Hotter and Dumber” thread. Bingobob is nothing to do with me. The reason I didn’t comment at the time was I didn’t realise what Revert2Mean was implying with “Oops, sock gets caught with his pants down!” It’s only after rereading the thread later that I looked up the meaning of this slang. So who is bingobob and what was he up to? (I’ve gained some insight from mentioning all this on yesterdays “ASX at Close” thread.)

    From the context, my suspicion is that Bingobob is a Green troll and I find that interesting. I didn’t realise Greens resorted to this kind of underhand deception. Call me naive, but I thought they were respecters of the truth with solid ethics, and that it was only people such as Chris Becker describes in his opening warning remarks who did such things.

    bingobob
    January 13, 2015 at 2:55 pm
    my name is geof

    Revert2Mean
    January 13, 2015 at 2:56 pm
    Bingobob said: “my name is geof”
    Oops, sock gets caught with his pants down! 😳
    LOL, that nicely answers the question about whether there are socks and turfers here or not 😛

    • noted Geof, thanks.

      I did note that there were extremists on both sides. For the record, I do not respect Revert2Means tactics at all and I have sinbinned him (and outright banned) on several occasions. I’ll keep a closer eye on this.

      • The Traveling Wilbur

        Dear Chris,
        I have finally, finally, managed to finish reading “chart-of-the-day-aussie-bonds”. Thank you for a most useful read. Much appreciated. I was looking forward to reading the comments… but… then I saw what you had been dealing with all week. Eeek. The posts on some of the other threads should simply have been removed. *That* would make bloggers think twice before including text in their arguments that was not relevant / useful / informative / adult. And you should really pay someone to do that for you (whatever technique you decide on / use). Actually, forget I said that. Call for volunteers. I formally put up my hand to act as one – and I wouldn’t be the only one I assure you. Seriously. Email through if that sounds like something MB wants to do (2300-0700 is my specialty). Your brain’s processing capacity should be left for a higher calling (not moderating pointless rows between [names deleted voluntarily]. Jeez.).

        That said, I really liked your Sweet Jezus post. Apropos. PS I miss the drumming monkeys. If I post something school-boy humourous again in the near future, can we get them back?

        Your sumble hervant,

        Wilb.

    • What makes you think bingobobs name ISN’T Geof? I know lots of Geofs

      CB: all right, thats enough, no more discussion here about turfing/tr)lling etc.

  2. Hyperinflation is present until land prices revert to mean. Delta is a sideshow, the absolute is what really matters.

  3. 1.6 percentage points is still a nice little earner.

    That first rate cut (Feb-March?) will be the start of things becoming interesting. That second (I reckon May) that HnH touts would pose some real hard ‘do you really love me?’ style questions.

    If there are no rate cuts then the AUD will be the plain Jane in a room full of ugly sisters though – especially once the Fed fends off a rate cut because the crude dive has wiped out employment gains.

    • Mate there won’t be a rate cut, the Tories aren’t so desperate for house price rises they’ll throw the passive income earning boomers under the bus…

      • I am not sure throwing the working poor under that bus will serve the Torynuffs any better.

        I reckon they are that desperate to prop up houses but also that the RBA would be seeing underlying demand as pretty weak and will feel the need to cut and cut fairly soon. There are job departures baked in – I have been on the blower with Hella this morning and they have told their people that their Melbourne plants are going in two years (circa 400 punters) – vis carmakers.

        I see the Feb statement wording as full of statements vis global downside risks, commodity crashes, an upside from cheaper petrol but downside on prospects for an LNG export boomlet, and our elected looking like extras from the cast of Gargoyles.

        That vermilion lipped blue haired slapper showing a bit of crinkled flesh at the auction scene is the only thing still out there asking if anybody is looking for a good time.

      • They already have though Mig, savings have been NRAT for a over a year officially, unofficially for many years (if land inflation was accounted for and appropriately weighted).

  4. The measure of inflation in Australia is about as reflective of reality as all the other measures such as unemployment.

    It has been utterly discombobulated in order to project predetermined desirable outcomes and results.

    There are crushing levels of poverty in this country due precisely the cost of living – which is absolutely NOT reflected in the CPI.

    The number of children in some areas living in poverty is believed to be as high as 1 in 3. Energy poverty, food poverty, rent poverty, mortgage stress are all compounding to destroy the consumer power in Australia – but again, there is low inflation.

    Quite simply its bullshit. Our methodology is at best profoundly unreflective and outdated and more likely corrupted by vested interests.

  5. The RBA and economist/corporate lobbyists are stuck between an ideological rock and hard-place. Let asset values deflate (actively make it your goal), and force the real burden of the adjustment on those who benefited the most via highly leveraged balance sheets and inflated asset values.

    You can’t keep hoping to increase demand via lowering interest rates. That much should be clear. It is insanity to keep doing the same thing that has failed countless times across the world. Ultimately it is going to have to come through greater profit share to labour, and quite likely greater levels of regulation/protectionism which would run counter to prevailing ideological settings.

    The alternative is increasing income inequality, lower demand, lower quality of employment, increased risks to social cohesion.

    • Even Glenny has mentioned IR slashing is not working as he’d like… it would be a really bad look (and policy) for him to slash rates further (or even hold) given he’s now stated this.

  6. You aint seen nothing until Mario pushes through EURO QE, AUD will be trashed vs USD….

    Zero vs 0.9% EURO 10yr vs 1.9% USD 10yr vs AUD 2,6% 10yr all AAA