Aussie bonds rampage to new highs

For some reason it didn’t happen yesterday with the terrible data but this morning Aussie bonds are off as weak US inflation cuts the leash. The entire price deck has shunted higher with long end yields ripping towards the 2016 all time lows (which I reckon they will take out with ease, 1% ten year bond ahead):

And a curve that has failed to steepen at all as yet indicating still building growth and inflation pressures:

The spread to the US is also still deepening, especially at the short end:

More downwards pressure building for the Aussie battler.

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David Llewellyn-Smith is chief strategist at the MB Fund and MB Super which is long international equities and local bonds that will benefit from a weakening Australian economy and dollar so he is definitely talking his book.

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Comments

  1. Does anyone have a primer on bonds?
    I feel like I sort of ‘get it’ but it doesn’t feel quite right.

    It seems like a boom = price rising and effective interest rate falling.
    And a bust = price falling and effective interest rate rising.

    Which sort of makes sense, but really feels wrong in a way I can’t quite put my finger on.

    • Try this…….there is very little supply at the moment so the bond market is getting squeezed and could make violent moves. This will change as the incoming gov. is forced into fiscal stimulus but the AOFM doesn’t want to issue much short term paper even though the hedge funds keep asking for it. The mainstay at the moment is 2.75% 10 years but really with the macro backdrop a bond index fund is the go.

      https://www.asx.com.au/documents/products/Understanding_Bonds-_AGB_web_version.pdf

    • Rain When I Die

      Same, I checked the Exchange traded Bonds to understand the liquidity and price at the longer end (10-15) years but not a lot of depth….I kind of want to test the waters with a small ASX purchase (and I do mean small)

      • My thought exactly RTID. So I bought a few small chunks of longer dated ETBs last week really just to see what happened. Their prices seem to move quite irregularly which I presume is the result of the very thin trading depth. Hence I didn’t tip much in.

        For example GSGB33 (ie about 14-15 years left to maturity). Up 0.82% today which seems a pretty big one day move by bond standards (well, it covers my brokerage, not much more!).

        Will now try to ignore them for several months at least – which is the point.

      • Depends. They hold a range of durations and quite a lot at the short end so you get very low volatility – which may well be what you’re after – not much capital gain (or loss) – just yield.

  2. HnH I think you are right re ASX at this stage.
    Think it’s forming a double top
    Was a very big bounce from 5500 to 6200 on really nothing.
    My thoughts were that as yields drop equities would be bought
    I am out of equities yesterday and today and like your view on bonds
    Just look at Germany 10 year is nearly zero
    I don’t know how the AUSSIE 10 year can’t go to 1%
    Think as ASX comes off people will run to bonds
    So a Q, I think it’s a possibility that if RBA does QE and AUD does fall to 50c that you’ll get a very good bounce in ASX but it may be from much lower levels.
    Maybe AUD to 7150/72 to take out a few shorts or do you think it’s a little toppy here at 71c

    • Honestly, bloody thing is very resilient owing to the global idiot trade on China stimulus. Yield spreads are going to have hand these dills their arses so it’s going to take time.

    • Big turnaround on your ASX call Bcnich – what was it that changed your mind? (Disclosure – I have almost nothing in equities so just interested in an academic sense).

      • Arrow
        We got a very nice bounce of 5450 to 6200 on really nothing
        My call on ASX is really based on if AUD falls to 45c and 10 year to under 1% with QE
        I saw what happened in US
        I’m just getting an irky feeling
        Bond yields at 1.96% and ASX struggling
        Think dow msy test downside
        The only thing I really feel more comfortable is HNH call to 1% on 10 year
        Asx has so much bank exposure
        I don’t want to trade on the basis of money printing etc
        It’s not worth the risk
        We always used to say you can’t go broke taking profit
        I have a bad feeling at the moment
        I think ASX will shoot up one day on QE but I’ll leave that to the boys with large gonads
        I’m taking a back seat now
        I think there is something brewing big time, think AUST is getting ready to go off a cliff

    • bcnich, you have been banging on about the ASX to 10,000, and now I read that you are out of equities!!!
      You will send your followers into a mass panic.

      • Andrew
        I’m hanging the boots up
        I’m with HNH now
        He has close to the best track record over the last 12 months
        He did miss 5500 to 6200 on asx but got everything else right
        I think his calls are correct at moment
        I got a nice bounce from 5500 to 6200
        I honestly didn’t think it would be 2/3 months
        I’m out
        I want to sleep at night
        My GF is getting pixxx off with me waking up at 2 to watch NY trading
        I was always a good trader becuase I took the ego out and was willing to admit I might have been wrong
        You need to be flexible and change your view
        For bonds to be this bid there is something really big coming
        I’m smelling the start of the collapse of global markets
        I think AUST is heading into the down spiral right now

      • bcnich I bet my kidneys on asx200 at 10000. Now I’m performing degrading acts behind the Aldi for jam sandwiches. I believed in ur wisdem

  3. A major bank calling 3yr bonds to 1.3% will have that effect …

    Right before the awful WBC sentiment data, which followed the similarly awful ANZ sentiment data yesterday and collapsing NAB Survey, NAB decided to capitulate in its prior views. So there it is in a nutshell. Doesn’t hurt that glibak bond markets are in rally mode either …