Bond Yields Back Near Recent Highs

There is no doubt that volatility has returned to US stock markets with the Dow Jones trading up approximately 1.5% early in the day but eventually closing flat. Much of the decline came in the last 15 minutes of trading with a sudden sharp decline going into the close. The S&P 500 also had a late decline that took this index to loss of 0.5% at the close.

Bond prices have been exceptionally volatile over the past couple of days. During the height of Monday’s stock rout, the yield on the US 10-year bond dropped from 2.87% to 2.65% in just a few hours but this decline has now been largely reversed with the yield currently sitting at 2.83%. Part of the rally in yields overnight was caused by a weak auction of new 10-year bonds as well as the announcement that the US senate has reached a deal that would continue funding the government for the next two years. Part of this deal includes a suspension of the debt ceiling and increased spending which is likely to increase bond issuance (i.e. supply) by the government. Australian bond yields have had a similarly wild ride and the 10-year yield is currently just above the US yield at 2.86%.

The market implied probability of the number of rate hikes to expect this year has varied significantly over the last couple of days. The probability of a rate hike at the March FOMC meeting is now 72% according to the CME FedWatch Tool.

The Reserve Bank of Australia left rates unchanged on Tuesday. Although the board acknowledged that GDP growth is expected to pick up to above 3%, there is still concern over household spending and debt levels. Inflation also remains low, just below the 2% target, which gives the board the confidence to keep rates low for now. The retail sales and trade balance data that was released on Tuesday were both below expectations. 

Data Releases:

-    China Trade Balance 12:00pm AEDT

-    UK Interest Rate Decision 11:00pm AEDT

To view the Rivkin economic calendar and Local Markets matrix, members can click here.

This article was written by William O'Loughlin - Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via william.oloughlin@rivkin.com.au or by phoning +612 8302 3633.

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This article contains information about foreign exchange contracts, which are considered complex financial products. Please click here to read ASIC's foreign exchange trading article before considering an investment in foreign exchange contracts. 

This article contains information about CFDs, which are considered complex financial products. Please click here to read ASIC's "Thinking of trading contracts for difference?" document before considering an investment in CFDs.
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