The Australian 10-year bond dipped under 2% for the first time ever earlier today.
That milestone has been accompanied by German 10-year bunds trading into negative for the first time ever, British 10-year gilts making an all-time low and US 10-year Treasuries trading back down to 1.55% overnight.
Naturally this bond market rally has been characterised as a result of the fear trade associated with market concerns Britain might vote to leave the EU on June 23.
But Roger Bridges, Nikko Asset Management’s Global Rates & Currencies Strategist, says the bond rally has been mapping the moves, positive and negative, of the British pound and poll result since late 2015.
“The US 10-year Treasury rate has been following the fortunes of the British pound for several months, driven by poll indications on the likely outcome of the referendum. The fact the ‘Leave’ vote seems to have increased in recent weeks has scared markets, leading the US 10-year Treasury yield to break below 1.70%, which had held as the lower bound in recent months,” Bridges said in a post on Nikko Asset Management’s blog.
The fact that bonds have rallied while stocks have remained relatively untroubled could be a signal that stocks are in ripe for a fall, Bridges says.
But he added that while “bond market participants love to remark that the bond market seems to spot a crisis before the equity market does…it could also be argued that it predicts crises that don’t actually occur”.
Either way, Bridges neatly points out that where the pound goes, so goes the bond market.