Rising government bond yields cause market turbulence

Friday 5th March 2021

Rising government bond yields cause market turbulence

Friday 5th March 2021
Written by Chris Lioutas


  • Equity markets were mixed this week with the US market falling on rising inflation concerns, whilst the European market held its own and the Australian market was flat to weak. Asian markets were mixed.
  • The bond market did its best to de-stabilise all other investment markets with government bond yields rising yet again on better-than-expected economic data, rising inflation concerns, and fears that central banks will not continue their accommodative policy measures. Yes, yields should have moved a little higher with expected better economic outcomes, but inflation and central bank concerns are unfounded at this stage.
  • Global oil prices rose after OPEC+ oil producers elected to keep production targets unchanged into April. The Saudis will extend their voluntary production cut of 1 million barrels per day.
  • The Aussie dollar finished flat this week against the US dollar, but the US dollar did rise against a basket of other currencies as it found support from investors given the better growth outlook.


  • The Reserve Bank of Australia left the cash rate on hold at 0.1% and maintained their other policy settings, saying they remain committed to maintaining highly supportive monetary conditions until its goals are achieved (2024 at the earliest), that is, inflation sustainably in the 2-3% band which will require significantly lower unemployment from here. Given the recent rise in bond yields, the Bank may have to increase their bond buying program (ie. money printing).
  • Australian real (net of inflation) economic growth rose by 3.1% in the 4th quarter, with household consumption increasing solidly, and dwelling investment, business investment, and public spending all adding to the growth. The quarterly print came in well above expectations. Economic growth contracted by 2.4% over 2020, with the economy 1.1% below its pre-Covid peak.
  • Total credit to the Australian private sector rose by a weak 0.2% January, with annual growth dipping to 1.7%. Housing credit was up 0.4% and sits 3.6% higher on the same time last year. Business credit growth contracted by 0.1% whilst personal credit fell 0.9%.
  • Australian company profits fell by 8.1% in the 4th quarter as government subsidies fell away. Hardest hit were non-mining firms with profits down 14.4% whilst mining firm profits were up 11.5% assisted by stronger commodity prices. Wages and salaries rose by 1.4% in the quarter.
  • Australian dwelling prices rose by 2% in February, with detached houses posting a strong 3% lift in the month. Leading indicators are pointing to further strong gains in dwelling prices. New lending for housing rose by a massive 10.4% in January, with the value of lending rising for both owner occupiers and investors. Growth in new housing lending (ex-refinancing) rose 10.5% in January, with strong growth from both owner occupiers and investors. New lending to first home buyers is up by 73.2% over the year.
  • The Australian current account surplus increased to $14.5 billion in the 4th quarter. The trade surplus widened due to strong rural and hard commodity exports, with exports rising 7.9% and imports rising by a lesser 4%. It was the biggest monthly trade surplus in Australian history, coming in well ahead of economist forecasts.
  • US consumer spending increased by the most in 7 months in January, but price pressures (inflation) remained muted.
  • European manufacturing data produced no significant surprises with the underlying recovery on-track. UK consumer credit data was weak in January and mortgage lending was also weaker than expected, though mortgage approvals were strong. German inflation data came in on the strong side of expectations at 1.3% on the same time last year.
  • A survey showed that the Eurozone economy is almost certainly in a double-dip recession as lockdowns continue to smash the services industry but hopes for a wider vaccine rollout drove optimism to a 3-year peak.


  • On the virus front, concerns have risen regarding Covid-19 variants. Whilst some concern is valid (though the data to date is quite spurious), it’s fair to say the press (and some governments) are doing their best to keep us fearful. There are variants to almost every virus. We have 3 options: accept that accounting for every variant is an impossible task and move on with making our own personal risk-based assessments of how we live our lives; accept that the vaccines are broad and effective enough to cover the main strains; or repeat 2020 lockdowns each year into eternity. Some countries are still operating like we’re in the dark on Covid-19 with 10 day plus hotel quarantines (21 days in Hong Kong) for inbound travellers.  The European Union and other parts of the world are also discussing “vaccine certificates/visas” (a slippery slope) but haven’t decided on what type of “privileges” they would grant.
  • On the vaccine front, the US FDA approved the Johnson & Johnson single-shot vaccine and outlined a fast-track approval process for new vaccines or booster shots to combat new strains. This is important as the technology used for the Pfizer and Moderna vaccines (ie. mRNA) allows for variant vaccines to be developed rather quickly, though trials and vaccine production would still be needed. The US announced that they will likely have enough vaccine doses by the end of May to vaccinate all adults.
  • The US House passed the mammoth US$1.9 trillion “Covid relief bill” and it’s now slated for Senate approval. Problem is there isn’t much Covid relief in the bill…….. The vote was largely across party lines with 2 Democrats voting against the bill. The bill will provide $1,400 stimulus cheques to households, but stricter eligibility criteria will result in less household stimulus than provided under President Trump. The $15 minimum wage proposal is unlikely to pass the Senate due to parliamentary procedure requiring a super-majority vote. 


Chris Lioutas, Director, Insight Investment Consultants

Chris holds the position of asset consultant for Maxim Advisors and is a current sitting member of Maxim's investment committee. 

With permission of the author, this article is presented by Maxim Private Clients Pty Ltd ASFL No. 511972

Maxim Private Clients Pty Ltd ABN 47 611 614 398 AFSL No. 511972

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