The 10 year swap rate spiked again this week, we assess the causes and possible strategies for investors in long dated bonds
We published an article last month on “Reassess or Reaffirm: Interest rates and the yield curve in Australia” which highlighted a sharp move higher in interest rates and its effect on long dated bonds.
After we published the note, yields fell back somewhat, but over the last few days they have again spiked back up to around that key 3.40% level in the ten year swap rate (see chart below). Three announcements fuelled the reaction:
- At Tuesday’s monthly meeting, the market expected the RBA to return to an easing bias, and this did not occur, causing concern that we are now at the bottom of the interest rate cycle. Going forward the RBA will be keeping a close eye on every piece of economic data that comes out to determine whether a change in bias is needed.
- Wednesday’s GDP figures were slightly stronger than expected, which partially justifies the lack of an easing bias from the RBA.
- Wednesday night, ECB President Mario Draghi warned of volatility in bond markets, which caused further consternation from investors in European government bonds, and this flowed through to our markets as well.
Source: FIIG Securities, Bloomberg
Following this surprisingly quick move, I wanted to reiterate the importance for investors who hold long dated bonds to continually reassess the long term prospects for those investments. There is every likelihood that this is yet again an unwarranted “knee-jerk” reaction, but if you think we are moving into an upward trend in yields, moving those longer dated bonds into shorter dated equivalents or into floating rate notes will help reduce price volatility. For those who have held those bonds over a longer time frame, they will be exhibiting some significant capital gains and higher yields could swiftly erode those gains.
For more information please contact your local dealer.