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Flight to safety drives bond yields back down

ECB president Mario Draghi: market expects further stimulus. Photo: Jasper Juinen Bond yields across the globe are heading down again.
Nanjing Night Net

Government bond yields fell sharply this week as sub-zero inflation, central bank stimulus and investor flight to low-risk assets amid global growth concerns drove up prices across the world.

The latest rally – yields fall as prices climb – has accentuated again the allure of Australian bonds, which offer one of the widest return spreads over European, Japanese and US counterparts.

After easing late in 2015, so-called carry trade – where investors borrow in one currency at a low rate and invest where fixed-income returns are better – is returning, market watchers say.

Economists have ascribed the Australian dollar’s resilience in 2016 partly to demand for the currency from investor flows into the country’s government bond market.

The benchmark Australian government 10-year bond on Tuesday was offering a yield of 2.36 per cent, compared with a high of 2.43 per cent on Monday and a 12-month peak of 3.14 per cent. The current level was last seen in April 2015.

The equivalent US Treasury, meanwhile, was on track this week for its biggest two-month decline in almost four years, Bloomberg data showed. On Tuesday, the 10-year Treasury was offering a 1.73 per cent return, down from 1.76 per cent on Monday and 1.78 per cent late last week.

The latest bout of bond buying was triggered by a raft of disappointing economic data from the US and Europe. Negative inflation rate

Germany’s benchmark 10-year bund yield, for one, hit its lowest point since April 2015 after the eurozone’s annual inflation rate dropped to negative 0.2 per cent in February, from 0.3 per cent in January.

On Tuesday the 10-year bund was offering a yield of just 0.1 per cent, down heavily from 0.14 per cent before Monday’s data release. It was the lowest yield since April 2015, just after the European Central Bank stepped up its quantitative easing, or bond-buying, program in a bid to stimulate investment and growth.

Markets are betting now that the ECB will be forced to expand its stimulatory policy again.

“Inflation is now negative throughout the big four eurozone economies – Germany, France, Italy and Spain – with the core measure also slipping, to 0.7 per cent from 1 per cent,” National Australia Bank’s global co-head of foreign exchange strategy Ray Attrill wrote.

“That is seen to mandate a strong response from the ECB . . . a fact not lost on the bond market,” he said.

Consumer prices across the world have been contained by a combination of low oil prices, flat wage growth, weak aggregate demand and lower input costs.

Even in Australia, where the official consumer price index is well above its US, Japanese and European counterparts, inflation is weak.

The Melbourne Institute said on Monday its monthly inflation gauge for February dropped 0.2 per cent from January, reducing the annual rate from 2.3 per cent to 2.1 per cent.

“The fall is largely due to continued downward pressure in fuel prices, which fell by 5.6 per cent [in February], following a 4.8 per cent fall last month,” Melbourne Institute’s senior research fellow Dr Sam Tsiaplias said.

This story Administrator ready to work first appeared on Nanjing Night Net.