Over the month of February bond yields fell across most markets. In Australia, 10-year yields finished down 13 basis points to a record low of just 0.82% while 3-year yields fell 12 basis points leaving the yield curve slightly flatter.
The move was even more stark in the US where expectations for interest rate cuts are higher. The US 10-year yield fell 36 basis points while the 2-year yield fell 40 basis points.
By the end of the month, the market had all but fully priced in another two interest rate cuts in Australia for this year (of which one was delivered on March 3) and four rate cuts in the US (of which two were delivered in one hit on March 4).
As the “diversification in action” chart above shows, there has been no better hedge against an equity market decline than bonds. The sharp drop in stocks and other risk assets in late February—fuelled by concerns about the spreading coronavirus—serves to remind us of that. It’s why we continue to believe that most investors should have an allocation, however modest, to high-quality bonds of intermediate or longer duration.
Yield on 10-year government bonds (%)
Fixed Income Analyst