Aussie bond prices hit all-time highs and Brexit buying...

In The AFR I reflect on Thursday's landmark financial market event wherein the 10 year Aussie government bond yield fell to below 2% for the first time ever (the 3 year yield also hit a record low of less than 1.5%), which has important valuation implications for all asset-classes. Despite above-trend economic growth that has run at a 3.6% annualised rate over the six months to March – and Sydney and Melbourne house prices that have jumped 13.4% and 15.2% over the last year – the $1.4 trillion local bond market is pricing in just one rate hike during the next decade. The question of course is how heavily the $10 trillion plus of central bank asset purchases have distorted these crucial prices, which proxy for the risk-free rates investors use in their valuation models. And the puzzle for asset-allocators is that one of the best performing asset-classes (viz., government bonds) since before the GFC is now paying nominal yields of less than 2 per cent, which are likely to be negative after accounting for expected inflation. Free (VIEW LINK)