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Risk-on trade drives US bond yields to 7-year high

Roger Balch  |  04 Oct 2018Text size  Decrease  Increase  |  
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Investor interest in US bonds ignited on Wednesday on the back of the increased appetite for riskier assets sparked by an expected decline in the US jobless rate this week to 3.8 per cent, the lowest since 1969.

This growing optimism about the US economy pushed the yield on 10-year US Treasuries, a benchmark for global borrowing, to the highest level since 2011. The rate on 30-year securities reached a four-year high and the greenback gained. 

Federal reserve sign article

There are concerns the US Federal Reserve may tighten too aggressively

US stocks lost most of the initial gains they made earlier on Wednesday, the S&P 500 closing up just 0.1 per cent. A rally in financial-services stocks failed to offset losses in real estate, utilities and consumer staples.

Reduced concern on Italy's fiscal situation this week was the catalyst for the turnaround in sentiment.

The yield on 10-year Treasuries climbed as much as 11 basis points on Wednesday to about 3.18 per cent, beating May's intraday high of 3.1261 per cent. The yield on the 30-years increased by as much as 12 basis points to 3.34 per cent. (Bond prices fall as yields rise.)

The jumps follow the US Federal Reserve increasing interest rates last week. Traders now see a 79.7 per cent chance of the Fed hiking rates by 25 basis points in December, up from 78.5 per cent the day before, according to CME's FedWatch tool.

However, there are concerns the Fed may tighten too aggressively.

"Just the recognition of the Fed saying the [US] economy is good, that means they are not going to slow down any time soon the rate of rate increases," says Mike Baele, managing director of US Bank Private Wealth Management in Portland, Oregon.

"If we were to think about risks to risk assets, rate increases would certainly be at the top of that list. The old adage is 'the Fed raises rates until something breaks'," says Beale.

Excitement in America turned to angst in Australia, with the Aussie dollar initially tumbling almost 1 per cent on the news, to US71.18c, extending its year-to-date slump against the greenback to 8.8 per cent. There was an inevitable widening in the gap between the US 10-year Treasury and its Australian equivalent, to 52 basis points early on Thursday morning.

The yield on US 10-year Treasuries is a benchmark for global borrowing, so the surge may increase the amount Australian banks have to pay for the funds they lend to Australian homebuyers with an unwelcome knock-on effect on house prices.

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Roger Balch is a Morningstar contributor

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is a contributor for Morningstar Australia.

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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