The recent bounce in the Australian 10-year government bond yield is due to a number of external factors, but the rate is still well below the "neutral" level, says BondAdviser.
The Australian 10-year government bond yield has been on a steady decline from its highs of around 2.9 per cent in November 2015 as the RBA cut the cash rate in May and August, according to fixed income researcher BondAdviser.
However, the 10-year market has risen "significantly" from a low of 1.819 per cent at the start of August to reach 2.303 per cent on 12 October, said BondAdviser.
The "volatile" transition of the 10-year Australian government bond yields is down to a number of factors, including the 10-year US market (which Australian government bonds track closely), the rally in oil price, continued quantitative easing by central banks (which has "spooked" bond markets resulting in a sell-off in markets like Australia) and the launch of Australia's first 30-year government bond.
Despite these factors, the key to understanding movements in the 10-year government bond yield revolves around where the "neutral interest rate" is sitting, said BondAdviser.
"This neutral interest rate refers to the interest rate that allows the economy to consistently grow at trend without stoking inflationary pressures. Importantly, this is not the official RBA cash rate but a long term interest rate (the 10-year government bond yield)," said BondAdviser.
Bond Adviser estimates the 'neutral' setting to be around 3 per cent, whereas before the global financial crisis it was closer to 5-5.5 per cent.
At 2.303 per cent, the 10-year yield is still below the 'neutral' rate, in spite of the recent bounce, said BondAdviser.
"This clearly demonstrates the need for further economic stimulus," said the researcher.
"For this reason, we assume the official cash rate will reduce further and/or a fiscal stimulus package will be rolled out, but external market influences are artificially inflating the 10-year government bond yield and hence it is difficult to pinpoint exactly where this will land."
Stimulate new ideas. Stimulate new thinking. Top up your CPD and hear from industry experts with InvestorDaily’s Knowledge Centre. Keep up to date with the latest trends and reforms, all while adding to your CPD. Explore the knowledge centre Knowledge Centre now.
Despite the Australian economy’s ongoing rapid recovery, an Australian equity head believes GDP growth will “fade” in 2022. ...