Proper Skepticism Even As Aussies Experience A Proper Rout

Australia, by contrast, now that’s becoming a proper bond rout. While the country’s central bank clings to its yield curve “control” fantasy, the long end of the AGS curve has gone true vertical. Yielding as little as 1.04% just four weeks ago on January 28, the rate for that country’s 10-year government bond has added an impressive 83 bps in the 21 trading days since.

More impressive still is how the market really hasn’t budged all that much so far as interpretation might be concerned. This was a universal problem especially back in 2017 and 2018 (like 2013) when the so-called Bond Kings were reported to have been speaking for the market as a whole; they never did. While they may have been – as they always are – bearish, globally sovereign markets didn’t really shift perception all that much.

In the media, rising nominal rates were spliced together with Bond King pronouncements to make what seemed a compelling case – that didn’t really exist.

This is also true right now; while much of the mainstream has been hysterical surrounding the past few months in bonds, even in Australia “the market” has kept its head.

“The markets are wrong” about inflation expectations, said Sicilia, chief investment officer of the A$56 billion ($43 billion) Host-Plus Pty pension fund in Melbourne. “Deflationary forces are bigger. Interest rates are going to stay at effectively zero.”

I think that’s a bit too harsh, too conclusive, and therefore too much like convention which likes to make this bond business into an exclusive binary: when yields rise, we’re told that can only mean the market is getting onboard with inflation; when yields don’t rise, they’re just waiting for the day until they do.

In other words, apologies to Sicilia, they are not “wrong” now even if you believe that inflation has little to no chance. The selloff in Australia’s long end is a good example; out of any national system’s, Down Under would benefit most from what commodity prices are managing right now. That’s why the AGS 10s are underperforming pretty much everywhere else.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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