Australian bonds yields remain very soft today:
Despite a solid move upwards in US yields after its jobs report. The spreads have hit new lows again across the curve with the 2 year at 41bps, the 5 year at 23bps and 10 year at 17bps:
It’s only a matter of time before the spreads invert for the first time since the millennium as Australian prospects sink and the US rise. The Fed will hike at least once more this year and Australia will not. Next year we’ll see even more monetary divergence.
The pressure on the Australian dollar is yet to crack it but a simple ratio chart shows that the lack of influence of the spreads on the dollar is reaching levels rarely seen. This is the 10 year, the red line is the average:
This suggests that the yield spread is reaching an historic dislocation with the value of dollar. One has to rise or the other fall.
The driver of the dislocation is the terms of trade rebound which is the inverse of the currency/yield spread right now, that is more closely aligned than is usual or common:
Given the terms of trade is already reverting to falls, with big plunges ahead for the next four quarters, the Aussie is going to head for Hades sooner rather than later.
