Monday, 24 June 2013

Bond sales mean higher interest rates

The global credit and equity markets are in turmoil following the US Federal Reserve announcement that it will curtail or "taper" its flagship quantitative easing policy soon.  The selloff in government and corporate bonds means rising yields which means increasing interest rates.  Good for savers? Not if the  economy is wrecked as could be the case for emerging market economies and their co-dependants, like  Australia.

Australian 10-year bonds were caught up in a global sell-off today, pushing yields above 4 per cent for the first time in a year....The yield on 10-year government debt soared more than 7 per cent today, continuing a trend that started last week when the US Federal Reserve signalled a possible end to its $US85 billion-a-month stimulus program. Bond yields move in opposite direction to bond prices. 
“This market move is quite unique,” US interest rate strategist Andrew Lilley said.“In the last 10 large sell-offs in bonds, inflation expectations were rising quite significantly because the economic outlook was getting better. This sell-off is unique because 10-year inflation expectations in the US in the last six weeks have fallen about 0.5 per cent.”
Local bonds were sold off more harshly than US bonds as global investors continued to pull out of Australian dollar-linked assets. The yield spread between Australian and US 10-year bonds increased to an almost two-month-high of about 140 basis points. 
"As bond yields start to go up, the support that equities and credit have received from lower bond yields start to disappear," he said.(here).

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