From Damian Klassen at Wilson HTM comes an interesting note on Australian government bonds, which you may or may not know can now be traded directly on the ASX:
Something doesn’t add up over the last two weeks.
1. Chinese GDP growth forecasts being revised down, Chinese equity markets down significantly.
2. Australian economists talking about possibility of recession, Australian equity markets down substantially.
3. Australian government bond yields up significantly and futures markets suggesting RBA cash rates interest rates will be higher in 18 months time
If the first two are right, then Australian government bond yields should be falling, not rising.
RBA Cash Rate implied by SFE Interbank Futures (%)
Source: Wilson HTM, Bloomberg
Additional Thoughts: I suspect that some of this is a liquidity trade, i.e. government bonds are easy to sell if you are a foreign investor looking to sell the Australia dollar.
If so, then the next steps will be:
We will see yield managers “rebalancing” Australian portfolios – i.e. selling other yield assets to buy Australian government bonds
Government bond yields come back down as a weaker economic growth is priced in
So, if you were looking for an opportunity to trade the new ASX listed government bonds, here are the codes:
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
