CHART: SocGen is bullish about Australian bond yields in the short term

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The outlook for the Australian dollar has grown more cloudy in recent months, with the currency coming under renewed pressure.

Commodity price declines and doubts about the strength of Australia’s economy have weighed on the Aussie.

Providing some support, ratings agency S&P last week confirmed Australia’s government debt as AAA rated. It’s also hoped that Australia’s trade surplus will be maintained by strong commodity exports in the near-term, thus boosting terms of trade.

In assessing the outlook for the Aussie dollar, there’s also been some discussion about the narrowing yield spread between US and Australian 10-year government bonds.

Australian 10-year bonds fell below 2.4% today for the first time since the US election in November. With US 10-year notes at 2.23%, that leaves the yield spread at just 16 basis points.

In view of its recent fall, the short term projections by Societe Generale for the yield on 10-year Australian bonds looks particularly bullish.

In the bank’s Global Economic Outlook report released today, SocGen is forecasting that Aussie 10-year’s will return to 2.9% by the end of June.

Source: Societe Generale

That will be quite a rise in 30 days, given that the US is expected to raise interest rates in mid-June and there’s increasing doubts about the strength of Australia’s Q1 GDP figures to be released in two week’s time.

Looking further out to March 2018, SocGen predicts that Australian government bonds yields will trade within a range of 2.9% to 3.4%, while yields on US treasuries climb steadily towards 3%.

Based on those projections, Aussie bond yields are expected to stay within their historical range, around 20-40 basis points higher than US government debt.

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