Long-dated Australian bonds are expected to continue to outperform US bonds in the next 12 bonds as traders bet on which country is likely to move first on interest rates, and the world's largest central bank steps away from stimulating financial markets.
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“We expect Aussie bond outperformance to US Treasuries to last for at least a year, and for the 10-year spread to tighten to around 70 basis points,” said Commonwealth Bank of Australia fixed income strategist Alex Stanley.
“The time frame for the first Reserve Bank of Australia rate hike is a consideration, but our forecast also reflects a more significant lift in US yields from a tightening in Fed policy in 2015. We believe that tighter Fed policy and a firmer US recovery will be an important global market theme in 2015.”
The prediction of Australian bond outperformance by CBA builds on a trend that has been in place for much of this year. The bank's view is shared by Blackrock, the world’s biggest money manager.
It comes as US Treasuries were sold off on Wednesday night, prompting a small rise in US 10-year bond yields to 2.56 per cent. Australian 10-year bond yields dipped slightly on Wednesday, meaning bond prices gained as more purchases were made. Yields are currently trading at 3.42 per cent.
Over the past six months, Australian bond yields have dropped 14.37 per cent while US treasuries are down 3.29 per cent.
Wednesday’s sell-off in US Treasuries however follows the decision by the Federal Reserve to once again taper its monthly bond buying activities by $US10 billion ($10.7 billion) to $US25 billion for the sixth month in a row.
Debate over the timing of higher interest rates has intensified among Fed officials as unemployment falls faster than expected and inflation picks up towards a 2 per cent target. Many economists believe that rates will move higher in the US next year.
This differs from the consensus view on cash rates in Australia, which are not expected to budge in either direction any time soon.
PIMCO managing director and portfolio manager in Australia, Robert Mead, said the RBA is likely to be on hold for “as far as the eye can see” which is likely to lead to lower investment returns in the year ahead.
Other factors that support Australian bond market outperformance at the long-end, bringing a tighter yield spread, are low bond yields in Europe, declining new bond supply and Australia’s AAA credit rating.
