Aussie bonds boom

And just like that, Aussie bonds are back with big gains last week and yields looking decidedly toppy:

The curve is flattening fast as growth and inflation prospects fade globally on OMICRON and Fed tightening:

The short-end of the curve has flipped to a negative carry with the US:

Aussie long-end yields are still completely out of whack with an unemployment rate 1% above the US yet yields higher!

I see more bid to come across the curve. Deutsche:

With Fed Chair Powell all but confirming an earlier end to the Fed’s taper program yesterday, parts of the US yield curve inverted. We are now starting to price some risk of rate cuts in a few years. In doing so the US curve joined the UK, Europe and especially many Emerging Markets where yield curves have already inverted aggressively. Yesterday we argued that the omicron variant – irrespective of the precise immunological properties – would just help reinforce existing trends, not change them. It is a fallacy that the market has been “looking through” COVID. Weak US labour supply, strong inflationary pressure in the goods sector, high excess saving, very low terminal rate pricing, a stronger dollar and very negative real rates are all because of persistent COVID forces this year not despite of them. It’s the new “COVID normal”, very different from the “old”. Is the market right to price such late-cycle dynamics? If the whole point of the Fed turning hawkish is to slow the economy down and take the unemployment rate back above the “new” NAIRU, the answer is yes.

Readers will know that the MB Fund has been buying the dips in long-end bonds and selling equities over the past few months. I still see this process as more mid-cycle slowdown than end-of-cycle shock so when yields get bid enough, and equities finally correct, we will rotate back into risk.

Houses and Holes
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