Via the excellent Damien Boey at Credit Suisse:
With bond yields rising sharply, the Australian yield curve (10-year bond yield minus cash rate) is no longer inverted. Investors have started to price out further RBA rate cuts for this year, although the expectation remains for one more cut on the balance of probabilities.
Connected with the question of how long the recent value rotation will go on for, is the question of how long central bankers will remain in easing mode. Value does well when the yield curve steepens, because curve steepening usually foreshadows a bottoming out in the growth cycle, giving investors confidence to pick up cheap cyclical exposures. At present, the expectation is for curve steepening on two fronts – higher long-term bond yields, and possibly, lower cash rates. But should the central bank decide to respond to the signal in higher bond yields, and start contemplating tightening, we could see curve flattening return more quickly, challenging value factor performance. How confident therefore, are we that the RBA will allow itself to get behind the (tightening) curve? And if they do deliberately slip behind the curve, for how long are officials happy to do this?
