The yield on Australian 30-year bonds just fell to the lowest level on record

(Michael Dodge / Getty Images)
  • Australian 30-year bond yields briefly touched 3% this afternoon, the lowest level on record.
  • Bond strategists Martin Whetton and Tim Kelly told Business Insider the move was due to a combination of domestic and international factors.
  • It followed a weak GDP print, along with a sharp rally in US bonds overnight as stocks tanked.
  • Ilya Spivak from IG markets said while the US 2-10 yield spread narrowed sharply, he doesn’t see it as a recession signal.

The yield on Australian 10-year bond yields touched 3% in afternoon trade.

According to ANZ rates strategist Martin Whetton, that’s the lowest level on record:

Investing.com

It follows a weak GDP print for the September quarter earlier today, with Q3 growth coming in well below expectations.

A subtle shift may also be underway in the outlook for Australian interest rates, with some economists now raising the prospect of rate cuts.

It also marks a broader move lower in Australian bond yields over the past month, in line with their US counterparts. Australian 10-year bond yields are now back below 2.5% for the first time since August.

US bonds rallied sharply again overnight amid a round of carnage on the S&P500.

Whetton told BI the move in Australian 30-year is a “reaction to the US as well as the weaker than expected GDP print”.

Tim Kelly, fixed income portfolio manager at Australian Ethical Investments, agreed that both domestic and international factors were behind the move.

Today’s underwhelming GDP print “will serve to push out both expectations of the timing — and possibly the direction — of the next move in the official cash rate”, Kelly told BI.

It also coincides with a “flattening of the US yield curve, as markets begin to anticipate a pause in the Fed’s tightening cycle may be on the horizon”.

“This near term uncertainty about future moves from both central banks is what’s behind the move in yields seen today,” Kelly said.

Benchmark US 10-year bond yields fell by eight basis points to 2.91%, leaving the spread with US 2-year bond yields at just 11 basis points.

The 2-10 spread, known as the yield curve, has long been a talking point in markets because when it inverts, recessions usually follow.

How long after an inversion the recession takes place is difficult to predict, but as a leading indicator it has a very strong track record.

However, IG Markets strategist Ilya Spivak noted that “the yield curve inversion signal has not been tested in a post-quantitative easing (QE) environment”.

He said it makes sense that US rate increases would accelerate at the short end of the curve, given the US Fed starting hiking rates well before it began reducing the size of its balance sheet.

“As more of the balance sheet is rolled off, long-end rates may rise more substantially and erase the recent flattening, normalising the yield curve,” Spivak told Business Insider.

“Bottom line, I suspect flattening may continue a while longer as rate hikes proceed and balance sheet adjustment plays catch-up, but I don’t see that as a US recession signal.”

Lastly, while today’s move in Australian 30-year debt was notable for hitting record lows, Kelly added a word of caution about reading too much into it.

“The Aussie long end is sparse,” he said. “At the 30-year end of the curve we’re really only talking about one bond — the March 2047. At $13 billion on issue, it’s a little over 1% of the index and it is only the second smallest issue of the index”.

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