Globally bonds are falling out of favor and Australian government securities haven’t been spared either.
Australian benchmark 10-year bonds yields have raced from 2.7% at the end of last week to 2.825%, a level the security has struggled to breach all year. Still analysts at National Australia Bank expect the Australian paper to outperform US peers in the long-term.
Global bond yields rose, led by US Treasuries after the odds of a US rate increase as early as this month in the world’s largest economy soared to 80%. Benchmark Treasury yields, which moves inversely to the bonds price, rose seven basis points to 2.46 percent, climbing for a third straight day to the highest level since Feb. 15.
Yields on Australian 10 year bonds have climbed 90 basis points since July lagging the 110 point rise for the US benchmark security. That comes as most economists expect the Reserve Bank of Australia to remain on hold for the rest of the year while the US Fed is at least seen delivering to rate increases. That will compress the yield premium Australian bonds, which currently offer among the highest yields among developed countries, command over US paper.
Short term increases in Australian yield “will depend on whether US 10 year bonds can break through the 2.6% range,” Alex Stanley, a rates strategist at National Australia Bank, told Business Insider. “Long term, we see Aussie 10 year bonds outperforming US bonds.”
On Tuesday San Francisco Fed President John Williams and New York Fed President William Dudley in separate speeches flagged the path ahead for Fed rate increases. Williams said policy makers will seriously consider raising rates at the Fed’s next meet on March 14-15. Dudley added to the case by saying the need for tightening “has become a lot more compelling.”