The global bond market rout is having its impact here in Australia with Australian Commonwealth Government Bonds (ACGB) getting hammered higher along with other bond rates across the developed world in the past week.
From a low of 1.95% last week in the wake of concerns about Deutsche Bank, 10-year rates in Australia have mirrored the move higher in US Treasuries and are sitting at 2.17% this morning – up 22 points.
Closer in on the curve, the 2-year ACGB is up a less aggressive 12 points, trading at 1.66% this morning. That outperformance at the front end of the curve is a reflection of the proximity of that rate to the cash rate and the smaller term premium embedded in the 2-year relative to the 10-year bond rate.
Rates are also sharply higher relative to the low for the year which is also a global bond rate phenomenon.
That move has built some conjecture thatthe 35-year bull market in bonds is over.
But while a two or three month move is far too early to tell if the tide has turned after a move that lasted 35 years, and has seen significant reversals in that time only for rates to push lower again, the risks are rising that the low may be in.
That’s important as the world’s most successful hedge fund manager, and founder of Bridgewater, Ray Dalio pointed out overnight.
Speaking at the 40th annual central banking seminar at the New York Fed, Dalio said that any uptick in bonds is important because (emphasis added):
If interest rates rise just a little bit more than is discounted in the curve it will have a big negative effect on bonds and all asset prices, as they are all very sensitive to the discount rate used to calculate the present value of their future cash flows. That is because with interest rates having declined, the effective durations of all assets have lengthened, so they are more price-sensitive. For example, it would only take a 100 basis point rise in Treasury bond yields to trigger the worst price decline in bonds since the 1981 bond market crash. And since those interest rates are embedded in the pricing of all investment assets, that would send them all much lower.
20 points is not Dalio’s 100 points. And last night, US 10-year treasuries backed off a break of the important 1.72/1.75% region, closing at 1.71%. But as the risks rise of a break of resistance, so too do the risks to other assets.
That’s as true here in Australia as it is in the US and across the globe.
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