RBA ON A VERY DIFFERENT PATH MEANS BONDS STILL MAKE SENSE

5 things to note after today’s hike by the Federal Reserve.

1. The RBA and the Federal Reserve are on different paths. The market is expecting another rate hike by the Fed during 2017. I believe it will be at the end of the year. In 2018 three rate hikes are expected. In Australia, the market is pricing the possibility, albeit small, of lower RBA rates.
2. Bond bears in the US have been frustrated, last night we saw lower inflation in the USA. The Fed is looking through inflation figures hoping to see an upturn in this important economic indicator. If they are disappointed bond bulls will have the upper hand.
3. Commentators have noted the 'old rule' that Treasury yields peak before the first tightening. That would mean that 3% observed before the Fed began tightening could be a high watermark.
4. Even though bond yields are lower in Australia than the peak in March, XTBs still offer attractive returns.
5. Every day an investor holds an XTB with a yield above a bank deposit they are rewarded with carry.