There has been a lot of tension in global bond markets lately as the US Fed’s now obvious desire to launch into its tightening cycle has crashed headlong into the greek crisis.
That’s meant periods in the past three months where bonds have been both super well bid — rates lower — while at other times they have been well offered — sold off and rates rising.
We’ve witnessed a couple of false breaks high in US 10 year rates and a putative move above 1% for German 10 year bunds.
It’s also meant that Australia’s 10 year bonds have traded in almost 50 point range over the past month with a low of 2.7% and a high of 3.16% in June.
That’s all turned around this morning with strong rallies on global bond markets as buyers are rushing to the safe haven of bonds while they try to work out what the referendum has actually achieved, calculate the probability of Greece leaving the Euro, and what impact that may have on markets.
This morning the Aussie 10 year bond has rallied 15 points to 2.94% right in the middle of the recent range. But crucially down and through the three month up-trend.
David Goodman, an executive director of market strategy at Westpac, told Business Insider “there has already been a big move this morning,” reflecting what markets currently know.
Goodman said “the next big leg lower (in yields) will likely come from contagion, revisions to RBA, Fed calls,” and any other risk-based events should they occur.
He said the most obvious trade was a “steepener” — that’s where the front end of the curve rallies faster than the back end. That suggests a repricing of RBA rate cuts as well as investors buying longer bonds.
But it doesn’t seem to matter where along the interest rate curve investors with increased uncertainty about Greece and a potential Grexit, With fear of contagion, on top of conditional probability on conditional probability the easiest calculation is, buy bonds.
That’s what’s driving rates today.