The implications of this are dramatic. Right now on 13 September the Fed tells us that the US ten year bond yield was trading at 2.97%. By our calculations, this bond yield will rise by 2.53% by the end of this business cycle to 5.5%. We would expect Australian ten year bond yields to rise by a similar amount.
Should this occur, the effect of such a rise in bond yields would have a more than significant effect on interest bearing securities and also on stockmarkets.
Conclusion
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Over recent quarters, the gradual tightening of the Federal Reserve has had no real effect on financial markets. This is because 10 year bond yields have not risen in line with the increase in the Fed funds rate.
By the end of this business cycle, US 10 year bond yields should rise to some 2.0% higher than the Fed Funds rate. A glance at the Federal Reserve estimate of the Fund Funds rate of 3.4% in 2020 tells us that US 10 year bond yields could move higher than the market expects.
The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual’s relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so. Those acting upon such information without advice do so entirely at their own risk.
This report was prepared as private communication to clients of Morgans and is not intended for public circulation, publication or for use by any third party. The contents of this report may not be reproduced in whole or in part without the prior written consent of Morgans. While this report is based on information from sources which Morgans believes are reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect Morgans judgement at this date and are subject to change. Morgans is under no obligation to provide revised assessments in the event of changed circumstances. This report does not constitute an offer or invitation to purchase any securities and should not be relied upon in connection with any contract or commitment whatsoever.
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