After a sharp sell-off in the first quarter bond yields have surprised the consensus by falling in Q2. The US bond market has led the decline, although the Australian bond market has seen a similar pattern.
The decline in US bond yields is interesting in the context of the two most recent US inflation readings, which have both been significantly higher than expected. As we discuss, a number of factors likely combined to produce a surprising rally in bonds in Q2, but we think this will prove temporary.
We expect renewed upward momentum in yields potentially around August/September as tapering guidance becomes clearer and the US labour market recovery re-accelerates. This may pose a headwind for equities, but we think it can largely be offset by sustained earnings momentum.
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David is one of Australia’s leading investment strategists.