Long bonds dominate as the oil price recovers
Last week was all about long bond yields. And it’s not surprising given German Bunds have gone from 7bps to 70bps in just a few short weeks. In fact long bond yields all around the globe have increased quite significantly since mid-January.
What’s driving them?
- sponsor - Wealth Know How
Wealth Know How is the online network helping people manage their wealth through financial education. Whether you are looking for simple ways to better manage your cash, or you are after a complete strategy on how to save for retirement, we can help you understand your options. It is important to have a vision for your future, but its knowledge not dreams that will ultimately deliver financial success.
Published on 12 May 15
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Last week was all about long bond yields. And it’s not surprising given German Bunds have gone from 7bps to 70bps in just a few short weeks. In fact long bond yields all around the globe have increased quite significantly since mid-January.
What’s driving them?Sponsor - Wealth Know How
Wealth Know How is the online network helping people manage their wealth through financial education. Whether you are looking for simple ways to better manage your cash, or you are after a complete strategy on how to save for retirement, we can help you understand your options. It is important to have a vision for your future, but its knowledge not dreams that will ultimately deliver financial success.
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Venezuela tension heats up
Duration 03:16
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Aussie dollar surprises market
Duration 03:10
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Duration 02:31
What’s driving them?
It’s mainly down to the recovery in the oil price, which in turn has reduced fears of deflation.
There have also been some suggestions that the rising oil price will enable the European Central Bank to conclude its bond buying earlier than planned - however we think this is unlikely.
Speaking of the recovery in the oil price – a barrel of Brent crude has reach nearly $70 – more than a 50 per cent gain from its January low of $46. Prices have been boosted by a few factors including:
A reversal of some of the Dollar’s earlier strength - A surge in speculative buying; and Hopes for a pick-up in demand for oil, particularly from Europe.
We believe oil prices will average around $65 this year given OPEC supply is ample and US output could quickly rebound.
We don’t think the rebound to the $60-$70 range presents a major threat to the global recovery. Even at these levels, prices would be well below the average of $110 for Brent oil that prevailed from 2011 to mid-2014.
The only real risk to economic growth is the response of bond markets to the rebounding oil prices. Whilst the oil price has eased the immediate threat of a damaging period of deflation in some economies, the risk remains that it could reduce the pressure to keep monetary policy loose for longer.
The budget will dominate Australian economic news this week. Beyond the budget, the strong run in Australia’s labour market came to an end last week - when the release of April’s employment data revealed a drop of 2,900 workers. Also helping drive the unemployment rate from 6.1 per cent to 6.2 per cent was an increase in the population.
That said, we are wary of reading too much into monthly changes in such a volatile data series; and prefer to look at the three month average - which continues at around 28,000 jobs a month. This compares favourably to the past five years, where an average of 13,000 jobs were created each month.