A fortnight ago, after an auction of US Treasury notes attracted the weakest demand on record, financial markets around the globe shivered. After that experience, a new set of Treasury bond sales this week is now making the markets nervous.
The Australian bond market has also been impacted by the developments in the US market, the deepest, most liquid and most influential bond market – indeed, market for any kind of security – in the world. The reason for the diminished interest is concern that US growth, and inflation, will exceed the Fed’s expectations and therefore rates will rise faster and harder than previously anticipated.
In fact those stocks have already taken something of a beating from the existing shifts in bond yields. By contrast, the Dow Jones Index is only about 0.4 per cent off its February peak. The Dow largely reflects the performance of “value” stocks, or the industrial companies and banks that have suffered – and whose shares were sold off – during the pandemic but could be expected to rebound in line with the economy.
The Biden stimulus program, coming after similar levels of spending in the initial US response to the outbreak of COVID-19 last year, will add massively to the supply of bonds the US Treasury will have to issue to fund the US government, so there is a simple supply-demand issue at playing the bond market along with the response to the expectations of accelerating US economic growth.