Australian 3-year bond yields remained above 4% last week in a quiet exit to May, which as a month was also largely unchanged after April’s aggressive sell-off off in bonds and subsequent increase in yields. The local 3s illustrate perfectly how financial markets have been “second-guessing” the path for interest rates over the last 12 months, i.e. the 3s are unchanged ~4% after 0.55 forays in both directions.
- We are targeting an eventual move by the local 3s down towards 3% in 2024/5, a move which should ultimately provide a bullish backdrop for equities and especially rate-sensitive stocks/sectors.
MM remains bearish toward Australian bond yields in the medium-term
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The ECB is expected to cut interest rates on Thursday, with many analysts expecting further cuts in September and December, although financial markets are only pricing in two cuts through 2024. This dovish outlook has helped propel European equities to new all-time highs. Despite a number of encouraging signs around inflation, a recent pickup in wage growth has raised questions over how fast the ECB may be able to lower rates; it has all but pre-announced a June cut through multiple hints by policymakers over recent months. Overall, we expect the ECB to cut rates a number of times through 2024/5, but probably in a more conservative fashion than many stock market bulls would hope.
- We’re ultimately targeting a retest below 2% for the German 10s through 2024/5 – again setting a positive backdrop for stocks.
MM is bearish towards German 10-year yields medium-term
