Global investors’ hunt for return has become so keen that Australian bonds have in recent months seen high correlations with changes in yields on German bunds, according to UBS Global Asset Management.
After making headlines for negative yields in March, German bund yields rallied in April and Australian bonds yields followed suit despite domestic economic circumstances being unchanged.
Ashley Perrot, managing director of Pan Asia fixed income at UBS Global Asset Management, said it was a symptom of investors all looking in the same place for yield, particularly as interest rates on Australian bonds are relatively high among developed nations.
“German bunds were never something that the Australian investor had to worry about,” he said. “But now everything is correlated, markets are now completely global.”
Sharp volatility is also being caused by investors chasing certain segments of the market for yield, but lacking enough investors on the other side of the deal. In April, there was an unusually high 20bps appreciation in German bunds in one day.
Such is the state of the market that UBS Global Asset Management is anticipating growing peer to peer trading to ease liquidity shortfalls caused by quantitative easing.
“The more liquidity is being pumped in the less liquid the market becomes, because the liquidity goes in to the same pockets chasing for yield,” explained Perrot.
In this way international investors targeting Australian bonds often come from investors whose domestic markets have seen yields decline due to quantitative easing.
“Five years ago European investors did not need to look for yields elsewhere, but you are not getting paid for the risk you are taking in Europe anymore,” he said.
The result, he added, was that domestic fund managers in Australia now had to be aware of not just local economic data, but what was driving investor behaviour globally.