'Zero macro. Zero': Behind today's huge rally in Australian government bonds

Adrian Dennis / AFP / Getty Images

Australian government bonds are surging.

Yields on benchmark Australian 10-year bonds have been in decline throughout the day (yields fall when prices rise), and have now fallen by almost seven basis points:

In bond markets, yield changes of that nature reflect trades worth billions of dollars.

The declines follow a speech by RBA Governor Phil Lowe yesterday, where he drew attention to the ongoing lack of productivity in Australia’s economy.

That view was reaffirmed by this morning’s employment data, which showed that a signficiant amount of extra slack remains in the domestic labour market.

Neither development provided any bullish impetus for upward pressure on interest rates, which could help to explain the decline in bond yields.

However, a domestic bond trader poured cold water on the idea that today’s moves were driven by macroeconomic factors. He told Business Insider bond futures contracts are in the process of rolling over, and there’s “still decent open interest”.

That means the current-month futures contracts for Australian government bonds are about to expire, and traders are switching to new contracts further out.

Futures contracts typically expire on the fifteenth day of the trading month, and trading ceases at 12:00 noon.

Open interest is another way of saying trading activity is still strong. In that environment, “the market has to go up”, the trader said.

So how much weight did the bond trader — a senior Australian strategist — attribute to macroeconomic factors such as underemployment?

“Zero macro. Zero.”

So that’s that then.

While key events such as inflation data and interest rate announcements can give rise to sharp moves in bond yields, sometimes the changes are driven by technical machinations in what is a huge and complex market.

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