Westpac: Still Too Early To Expect A Reversal Of The Bear Trend

Westpac note that with “U.S. 10-Year yields nearing the 2018 peaks, and our forecast Fed cycle having only a slightly higher terminal rate than that which prevailed at that time, we suspect that the yields are somewhere near the upper end of the trading range. Indeed we would expect that bond yields will peak in the next 2-3 months and narrow toward the ultimate peak in Fed Funds. Given the correlation between the two markets, that has implications for the Aussie bond market as well. The ongoing upward pressure on yields will see the spread to cash peak around 75bp at the end of the cycle. In short, while relative to our forecasts, there is value in the longer bonds, the skewed risk rewards and inflation risks suggest that it is too early to shift to either a strategic long duration position or even a tactical long.”