Bond markets are unconvinced about economic growth

Sydney, NSW.

Government bond yields in major markets rallied overnight in the wake of the US Federal Reserve’s decision to raise interest rates.

The yield on 10-year US treasuries fell by around 8 basis points to 2.13%. That takes the yield on 10-year notes to their lowest level since the US election in November, as concerns mount that the “Trump-flation” trade has run out of steam.

US bond yields climbed as high as 2.6% in December as markets grew optimistic that the Trump administration’s proposals for tax reforms and infrastructure spending would provide a boost to the economy and raise inflation.

Throughout the course of 2017 however, that momentum has slowed. Donald Trump’s government has been unable to enact its policy proposals, and the time frame for its market-friendly reforms has been pushed back.

Furthermore, a recent poor run of hard data suggests that the US economy may still be facing some headwinds. US inflation and retail sales figures overnight both underwhelmed, but the US Fed remains optimistic that the economy is still on track.

The yield curve continues to flatten, with the spread between 2-year and 10-year US treasuries at its lowest since July 2016.

As part of a broad rally in global bond yields, Australian government bonds also saw heavy demand overnight. Following a similar path to US treasuries, the yield on 10-year Aussie bonds dipped by around 8 basis points overnight.

After trading as high as 2.98% in March this year, Aussie 10-years dipped from their recent range of 2.4% and a short time ago this morning were trading below 2.34%.

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