Australian government bonds have been incredibly sensitive to the US Fed’s quantitative easing measures and any suggestions about when Ben Bernanke might turn off the tap.
Bank of America Merrill Lynch rates strategist Bin Gao reports that Australian rates have been far more sensitive to US Treasury yields than China and Japan.
This wasn’t the case when the Fed cut rates in June 2003; at the time, Australian Commonwealth Government Bonds were relatively insensitive to US Treasury yields while Japanese government bonds were highly sensitive, Gao reports.
Here’s why BAML thinks Australian rates are so sensitive to US QE this time around:
The market impact of QE tapering centers around two effects, the price impact on the interest-rate level, and the quantity impact on liquidity.
Australia’s budget has weakened significantly, due to China’s slowdown.
The Australian government missed its target last year by A$20bn and will keep running a deficit for at least another year of a similar magnitude.
The increased ACGB supply makes the bond more vulnerable to higher UST rates.
The unstable AUD, expected to weaken further on Fed tapering, also keeps global investors on the sidelines and limits their demand.
As such, we believe the high sensitivity of the ACGB curve to the UST curve will stick.