Australian economy still vulnerable to US bond | Australian Markets

Donald Trump’s dramatic tariff backflip has soothed turbulent bond markets however not all is “beautiful”, because the US president declared.

Amid hovering uncertainty merchants stay on edge – with the volatility index at a five-year high – and Australia shouldn’t be immune to financial shocks from the US.

While Mr Trump was ready to journey out falls on equity markets, he could not afford to look by what was occurring within the fixed income market, as bond yields surged when they need to have been going decrease, IG markets analyst Tony Sycamore mentioned.

As the risk of an financial downturn rose and hedge funds received squeezed, buyers bailed from US authorities debt, sending bond yields skyward – one thing Mr Trump could not ignore.

“The bond market is hugely, hugely important. It governs all the other markets,” Mr Sycamore informed AAP.

“He realised that he risked causing some very significant damage to the US economy, to the plumbing, to the liquidity, and I believe that was the catalyst for him to change tack.”

Mr Trump acknowledged the considerations after his choice to pause tariffs.

“The bond market right now is beautiful,” he mentioned.

“I saw last night where people were getting a little queasy.”

Brown Brothers Harriman strategists Win Thin and Elias Haddad mentioned the aid rally was possible to be short-lived.

“The pervasive uncertainty created by continuously changing US tariff threats and escalating US-China trade war remain a major drag to the global economy,” they mentioned.

There is heightened risk the US falls into stagflation, which spells unhealthy news for bond costs as it will restrict the Federal Reserve’s capacity to cut charges to enhance the economy.

Markets are set for months of uncertainty, with the delayed tariffs still looming overhead.

That might spell bother for the Australian economy if US bond merchants get spooked again.

“We don’t operate in a vacuum and our bond markets are linked to what’s going on in the US,” Mr Sycamore mentioned.

“If yields are going higher in the US, then our bond yields are going higher too.”

That’s particularly troublesome for Australia’s banking sector, which derives important funding from abroad markets.

“When these bond yields start to move around, it makes their funding more expensive,” Mr Sycamore mentioned.

“It’s not something which a one or two-day move is going to be particularly important for.

“But if it occurred over the space of a week or two or three or 4, and their funding prices begin to blow out, that may very well be problematic for the banks.”

Reserve Bank governor Michele Bullock looked to reassure Australians at a speech on Thursday night.

“The Australian financial system is robust and effectively positioned to soak up shocks from overseas,” she told the Chief Executive Women annual dinner in Melbourne.

Traders are predicting the central bank to cut interest rates at its next meeting in May before possibly delivering another 100 basis points of relief before Christmas.

Each 25 foundation level cut would shave about $90 off the month-to-month curiosity funds of an average $600,000 mortgage.