Bond yields bounce past 3% for the first time since 2015. Here’s how the ASX 200 is responding

There’s another catalyst for price change in the markets today…

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Key points

  • Yields on long-dated bonds are spiking again and this has implications for equities
  • ASX 200 shares have shrugged off the rising yields as correlations between bond yields and ASX large caps grow closer
  • The S&P/ASX 200 has jumped 52 basis points on the day to 7,481

The long end of the Australian Government bond yield curve has just surpassed 3% for the first time since 2015.

Yields on long-dated bonds have spiked in 2022, with the Australian Government 30-year bond, in particular, shooting up to a yield to maturity of 3.33% at the time of writing.

Meanwhile, the Australian 10-year yield is 25 basis points off the 3% mark, while bonds with three and five-year maturities are at 2.5% and 2.8% respectively.

The Australian Government yield curve is also upward sloping, but flattening for long-duration bonds, data shows.

TradingView Chart

The rally in government bond yields comes somewhat as a surprise to fixed income investors seeing as yields were at their lowest points on record just some months ago.

“Market fragility after the end of RBA [Reserve Bank of Australia]’s yield-curve control has meant the speed or normalisation priced in overnight-indexed swaps [OIS] isn’t calibrated to local fundamentals,” wrote JP Morgan analysts, cited by Bloomberg, regarding the RBA’s posture on changing base rates.

Investigations by Bloomberg Intelligence support this view, noting “OIS meeting-dated swaps signal approximately 70% odds of [a] May RBA hike [to base rates],” in reporting today.

As investors pay more attention to risk budgeting, the yields on government bonds are becoming increasingly important indicators of market sentiment.

How have ASX 200 shares held up?

Typically there’s an inverse correlation between the yields on long-dated bonds and the overall stock market in the longer term.

However, these aren’t typical times. Recently correlations have turned more positive than not, and Australian large caps have snapped back in 2022 alongside the rise in government yields, seen below.

The relationship has carried on until today, with the benchmark S&P/ASX 200 Index (ASX: XJO) spiking 52 basis points on the day to 7,481 while the 10-year yield is up 37 basis points.

TradingView Chart

As a result, Australian shares are powering home on Friday having restrengthened over the past month. Miners and financials still lead the way, although there are plenty of pockets of green dotted throughout the market.

But that’s not all for Aussie investors. The RBA looks certain to increase the cash rate, says Jay Sivapalan of Janus Henderson.

“The three preconditions the RBA set for cash rate lift-off (unemployment close to 4%, inflation sustainably within the 2-3% band, and wages inflation above 3%) are likely to be satisfied within the coming six months,” he told Livewire.

This could mean a wave of buying opportunities, Sivapalan says, seeing as higher yields on long-dated bonds means lower valuations on equities.

“The recent lift in bond yields, swap spreads, and credit spreads have, in our assessment, created a unique opportunity to effectively ‘lock in’ investor outcomes at reasonably attractive levels,” he added.

That’s worth thinking about.

Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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