Australian bonds are getting smoked as the Trump-initated rout rolls on

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Australian government bond yields are soaring yet again on Tuesday, mirroring moves in European and US sovereign bond yields on Monday.

The benchmark Australian Commonwealth Government Bond (ACGB) 10-year yield currently sits at 2.71%, according to pricing from Thomson Reuters, the highest level since April 27 this year.

That was the day Australia’s Q1 consumer price inflation report was so weak it triggered two 25 basis point rate cuts from the RBA over the next three months. Now it’s at a seven-month high, only 75 days after hitting the lowest level on record in early August.

What a turnaround, especially in recent days. From the close on Tuesday, November 8 — the day of the US election — yields have soared by 35 basis points, or close to 15%.

Australia 10-Year ACGB Yield Daily Chart

The move in Australian yields has been driven by a similarly enormous move in US yields following the election of Donald Trump as the next President of the United States.

“Bond yields continued to push higher and the US dollar strengthened as markets bet that US president Trump’s commitment to unleash fiscal stimulus will push inflation and growth higher,” said ANZ’s economic team on Tuesday.

“Market-based measures of inflation compensation have shot up too, with the US 10-yr breakeven now above 1.9% and US 5yr-5yr inflation swap at 2.5%.”

Breakeven rates measure expectations for the average inflation rate over a period of time.

ANZ also notes that “Fed funds futures now imply a 92% chance of a rate rise for December, compared to 84% on Friday, as markets are pricing in higher inflation.”

A slam-dunk view that the Fed will hike rates if there ever was one.

While bond yields around the world are being propelled higher, ANZ cautions that it may be hard for the move to be sustained in the absence of concrete policy announcements from Trump.

“How much the rout in Treasuries can run in the very short run without any substantive policy confirmation in the US is also a valid question,” it says.

“Some moderation in the pace of decline in fixed income markets may be warranted and it is important to watch the interaction between US equities and Treasuries.

“That should also hold implications for emerging markets FX – which has suffered recently as rising inflation expectations and higher yields in developed markets have curbed expectations that the diversification towards higher-yielding assets will continue apace.”

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