Bond market ‘Armageddon’ draws nearer

Co-founder of the Switzer Report
Print This Post A A A

The next big bear market – in bonds – is well underway. I have been warning about this and the potential capital losses that SMSF trustees face for some months now. Unfortunately, this latter possibility is not always appreciated. (See our 26 November edition of the Switzer Super Report - ‘Beware the bond market trap’)

While last week’s employment data was a little bit too good to be true – (of the 71,500 new jobs created, 53,700 were part-time jobs, and according to the ABS, about 90% of the employment growth came in NSW and Victoria) – bond yields rose in response to the data as the market realised that short-term interest rates are close to the bottom. Further rate cuts are becoming increasingly unlikely.

What does it all mean?

In fact, 10-year Australian Government bond yields have been rising for some time now, from a low of 2.70% in July last year, to close on Friday at 3.62% (see Chart 1 below). This increase of almost 1% in yield translates to a change in the price of the 10-year bond of 7.8% – that is, from $100 to $92.20 – which is a bit like saying the stock market has fallen from 5,100 to 4,700!

In the USA, the trend is even more pronounced. Off a much lower base, US 10-year treasury bonds are back around 2.0%, having fallen as low as 1.4% last year (see Chart 2 below).

The US, Europe and now Japan are essentially singing from the same hymn book – they are going to do “whatever it takes” by effectively printing money to get economic growth (and inflation) on the rise. As confidence improves, asset prices (stock markets, and now property) are moving higher and at some stage, interest rates are heading the same way. The bond markets know this.

Also from this edition