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  • Writer's pictureCrest Economics

Key development over share markets due to rising bond rates- February 2021

Global share markets took a fall in the last week as concerns rose about valuation of bonds. Bond yields have increased significantly to 0.13 basis points in Australia before settling back due to aggressive bond buying by the RBA to defend its 0.1% 3 year bond yield target. A bond’s yield is based on the bond’s payout value divided by market price; when bond prices increase, bond yields will fall. Coincidentally, falling interest rates make bond price rises and bond yields fall. In the global market, shares remain at risk of further short-term correction with increases in bond yields being a trigger. We are likely to see a gradual shift away from investments like US shares, technology and health care stocks and bonds to investments that will benefit Australia’s productive capacity such as resources, industrials, tourism stocks and financials. Strong virus control, stronger stimulus and growth in sectors like resources, industrials and financials have driven up Australian shares, with dividends resulting in a 4.5% increased grossed up dividend yield.

Rising oil, metal and iron ore prices have briefly pushed the $AUD to a 3 year high at $US0.80 before falling back. The spike in bond yields is proving to be a challenge for central banks, especially the RBA. Rising bond yields are to be expected in an economic recovery from investors anticipating stronger nominal growth, which has been propped up by vaccine rollouts, the immense fiscal stimulus by the USA and rising optimism. Tax Office data has revealed that there has been a further reduction of workers on JobKeeper from 1.5 million in December to 960,000 in January, implying that 2.7 million jobs have left JobKeeper protection. Unemployment rate falling from 6.9% to 6.4% further adds confidence that the ending of JobKeeper at the end of March won’t cause a big spike in employment. However, without a tighter labour market and higher wages growth, the RBA is concerned that the anticipated pick-up in inflation won’t be sustained and will undershoot their inflation goals. Economic growth is expected to show a 2.6% quarter on quarter gain, driven by strong rebound in consumer spending, housing construction and strong public spending.

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