A look at the bond market reveals a very large jump in bond yields the day after Trump was elected.
What a year it has turned out to be. From the mild (Western Bulldogs Premiership) to the momentous (Brexit and Trump presidency), 2016 has seen it all. Before discussing more recent events, let’s take a look at how bond yields have been performing since our last update in September.
In our last update, we discussed the ‘see-saw’ action of falling long term yields (lowered investor expectations) followed by an official rate cut to lower short term rates. The rate cuts protected the yield curve from inversion (long-term rates below short-term) and maintained its steepness, but at a lower starting point.
Since August, yield on 90 day bills has remained the same in each following month, while medium and long term yields have increased by up to 32 basis points between August and October. In October, the 5-year and 10-year yields are finally above those on 90-day bills, meaning the yield curve is only slightly inverted. Total interest spread (difference between 90-day bill yields and 10-year bond yields) is now 46 basis points, up from only 12 in August.
While there has already been much speculation on how a Trump presidency will affect markets worldwide, the only certainty so far is that Australian treasury bond yields made a very large jump the day after the election. This is shown in Figure 2. Interest spread also increased by 17 basis points, meaning investors are both expecting slightly higher interest rates in the short term and higher velocity rate hikes. Overall, this is a good sign for the economy, and almost rules out any additional rate cuts by the RBA, assuming no other changes in conditions.
This week, 10-year bond yields have increased by another 20 basis points, reflecting increased investor confidence and expectations of growth in the near and longer term future. Not only does this almost rule out an interest rate cut in Australia, it increases the likelihood of raising the official cash rate in December (less likely) or in early 2017 (more likely). The bond market movements are great news for savers, but bad for borrowers, as it will make debt more expensive to repay.