Australian government bonds are rallying again

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Australian government bonds saw more demand across the curve overnight, in conjunction with a similar rally in US bonds.

A short time ago this morning, yields on Australian 10-year bonds were close to falling below 2.5% for the first time since late June:

The fall in yields on US government debt followed the release of the minutes from the US Federal Reserve’s November meeting, which showed committee members have doubts around how soon inflation will rise.

That follows the RBA’s quarterly statement on monetary policy on November 10, when Australia’s central bank downgraded its own inflation forecasts.

Martin Whetton, senior rates strategist at ANZ, said the move lower in Australian bond yields was mostly driven by the US rally.

“It’s also a combination of investor positioning, continued low inflation and curve flattening,” Whetton said.

The US Fed has a sole mandate to keep inflation in a range between 2-3%, and core inflation remains stubbornly below the target band despite steady growth in employment and the economy.

While another rate rise in December is almost a certainty, the minutes add some uncertainty about the pace of further rate hikes in 2018.

Benchmark US 10-year bond yields fell three basis points to 2.32%, down from a recent high of 2.47% in late-October.

Despite the fall in US bond yields, the recent rally in Australian government debt has been markedly stronger.

At current rates, US 10-year yields are at similar levels to the start of October but Australian 10-year yields have fallen almost 40 basis points since then.

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