The bond bloodbath we’ve seen in the past week continued last night:
The curve has steepened materially:
And spreads to the US have narrowed:
The question is: is it a turn or counter trend rally? It makes sense that yields rise as iron ore rebounds, house prices rebound and there’s hope abroad for Brexit and a trade deal, but these things will need to become concrete or the bond bid will return.
On the global front we remain skeptical. On the local front, it is clear that a property price rebound is underway but the economy is still falling away with no substantive turn in sight. There is further RBA action ahead, especially to assuage the dwelling construction bust.
Given the bond market has now all but priced-out any further RBA rate cuts that is a reason to buy this bond dip though there is an obvious risk that if external risks improve further then more RBA cuts will steepen the curve as the long end underperforms.
We sold materially into the rally so have capacity to buy. We’ll wait a little longer before getting longer again.
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