Australian bonds are getting hammered

There always seems to be less focus on bond and swap rates than there is on stocks trading on the ASX and the Aussie dollar.

We don’t see bond or swap rates paraded out on the morning and nightly news like we do for the currency and the stocks. Bonds and other longer-term interest rates also struggle to get anywhere near the focus that the RBA’s once-a-month deliberations on monetary policy.

But that lack of focus doesn’t mean that the bonds are any less important in affecting economic activity throughout the economy. Indeed, the RBA might anchor the short end of the interest rate curve by setting its cash rate target but it is longer rates – think 3, 5, 10 and 20 years – where the government and companies borrow to invest.

Bonds also help set the discount rate by which stock investments are judged and impact the hurdle rate through which return on investments are made.

So in the context of the past few days’ stock market sell-off, it’s important that Australia’s 10-year bond rate has been hammered.

From a close of 2.71% on Monday afternoon, Australian 10-year government bonds rose 20 points to end the day’s trade yesterday at 2.91%. But the global bond market rout has continued overnight with the US 10-year Treasury up 11 points and German 10-year bonds up another amazing 17 points to 0.89%.

That means bonds have been hammered again overnight with the June 10-year bond futures contract on the ASX down 16 points (price is inverse to yield). This implies the 10-year physical Aussie bond is going to open trade this morning at 3.065%.

Not only will this be the highest rate for the 10-year bond since November 2014, it will also break the one-year downtrend.

That will be important to interest rates and stock traders alike.

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