Bond yields have been the “Tail wagging the dog” in 2021 with the ~80% surge by the Australian 10-years creating a major headwind for some Australian Sectors e.g. IT, Healthcare and the classic “yield play” space such as Utilities / Transport. Our opinion is these stocks have primarily suffered due to the speed of the ascent after many complacent bond bulls were caught short assuming interest rates would continue to fall into a never ending abyss.
NB Bond prices move opposite to their yield hence prices fall as the yield rises.
MM is bullish 10-year bond yields but we can see a period of consolidation after the recent sharp appreciation, such a period of stability in the bond market should help stocks at least short-term. Also, the RBA remains committed to maintaining its cheap money policy with plenty of fixed home loans available under 2% providing an excellent tailwind for risk assets until investors start looking further ahead.
Last week we saw US 30-year bonds continue their push towards 2.5% but with the Fed meeting this Wednesday / Thursday MM wouldn’t be surprised to see Jerome Powel attempt to calm the excited bond market however its likely to be a tough ask with Joe Biden’s aggressive $US1.9 trillion stimulus being rolled out asap – we can see the 30-years rotating between 2 & 2.5% for the next few months.
