Australia: Global themes will continue to provide directional impetus - Westpac

Research Team at Westpac, notes that the Australian bonds have been moving in a broad sideways range since the RBA re-initiated its easing cycle in May.

Key Quotes

“The best tactical approach to the market during that time (and for the last year) has been to be either long or square and to tactically buy into any dips, especially those led by an offshore swoon in risk sentiment.

There is little reason for us to alter that tactical or strategic approach to the market. While sentiment appears a bit vulnerable to a more negative turn this week if Fed Chair Yellen’s speech is interpreted as preparing the market for a 2016 rate hike, even then we are not expecting a material or sustained bear market to begin anytime soon. So any bearish impulse should provide improved entry levels for longs at the appropriate time.

The ongoing yield seeking bid in global bonds remains the dominant feature of price action which is supported by domestic fundamentals, as summarised by the RBA’s easing bias.

At the same time we acknowledge that current levels fully reflect these risk rewards, so we advocate having only limited risk on at current levels.

Without any major domestic risk event to produce a re-assessment, Australian bonds will remain well anchored. So, for now the ranges are relatively well defined: 3yr futures 98.52 to 98.65; 10yr futures 98.00 to 98.20. In both instances the risks on a 1-3 month time horizon are biased toward higher prices.

The biggest concern for bonds is whether or not a material bearish correction is nigh. In our view, while the BoJ, ECB and BoE QE programmes remain in full swing that is unlikely.”