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Summary
- Australian bond yields soared 20 basis points last week following an uptick in the US treasury bond yield.
- The Biden government’s stimulus package worth USD2 trillion is expected to further increase supply of bonds in the market.
- The UK budget promised further protection of jobs with policies potentially enhancing the positive sentiment in the market.
The surge in US treasury yields has impacted global economies, stirring the pot for already vulnerable international markets. The sudden increase in the 10-year treasury yields stems mainly from an expected USD2 trillion stimulus package rollout.
The expectations of rising inflation have further pushed up yields for these US 10-year government bonds. Consequently, global treasury yields have surged following the upward course taken by US treasury yields, including yields on the Australian bonds.
US Treasury Yield Rise
The rising yields are an indication of rising appetite for risk that is developing globally. The optimism surrounding economic growth and thus, increased inflation in the coming months have fuelled the bond market ructions.
Not just the fiscal stimulus, the vaccine roll-out has also enhanced these expectations. Meanwhile, real yields started to show improvement, which further made the surge more pronounced.
The stimulus package is expected to add to the supply of government bonds in the market, which could further intensify the pressure on the bond prices.
RELATED READ: US Stocks Rise As Bond Yield Stalls, Rate Fear Wanes
The Australian Bond Market
Like most countries, Australian bonds have also experienced a yield surge. The Australian 10-year yield increased by 20 basis points to 1.93%. The surge saw a momentary halt as yields dropped on Monday to 1.64%.
What followed was a big sell-off of equities in the last week as yields shot up. Higher bond yields tend to make stocks appear less attractive as they tend to reduce the incentive attached to dividend payouts. They also make debt servicing harder for companies.
RELATED READ: How Bond Yields are Driving the Forex Market
However, central banks across the globe are trying to put a stop to this yield surge. Thursday’s 29-point drop is a testament to the same. The RBA bought around AUD4 billion of government bonds followed by significant purchases last week. However, the central bank is still struggling to maintain a hold on the interest rate amid the soaring bond yields. This has impacted the Australian Dollar which shot up 80 US cents, consequently impacting the Australian economy.
ALSO READ: Gold Prices tumble to 9 months low amid surging Treasury Yields
The UK Government’s Budget and What it Holds for AU
Chancellor Rishi Sunak revealed the budget for 2021 with a key focus on the protection of jobs and livelihood. The budget came with the 6-month extension of GBP20 weekly uplift in Universal Credit amounting to GBP1,000 over a year. The budget also includes additional government support in areas of working tax credit, minimum wages, grant and furlough.
This additional government support is likely to further boost positive sentiment across the UK. With the expectation of rising government support, economy may once again see a sudden outburst of optimism. This may not go down very well with the bond markets, at home or globally. Thus, further taps by central banks on bond yields can be expected in the coming months.
