Steep Yield Curve / Consumer Sentiment

You have no doubt noticed the movement in the shape of the yield curve over the last couple of weeks. Look at our website homepage to see just how steep it has become www.curvesecurities.com.au.

Yields for 3 - 5 years have moved up by 30 to 50 points. As I have mentioned many times before the long end of the curve will sell off dramatically to price in feared inflation when growth returns. The 'green shoots' have got those fears started. A one basis point move of a 10 year bond is worth a lot of money - $750 odd per mill - so the long end is quite skittish in these sorts of environments. No one wants to be caught long when the long bonds sell off as it can be extremely costly. The extra supply likely from the government isn't helping but it's not the main reason. The fact that the economy is unlikely to be able to sustain this mini recovery we're experiencing means that the sell off in my mind will run out of steam soon and there are some good opportunities to get some great longer term rates - around 6% for 3 years for instance. Particularly if the alternative is the short end where we may endure another easing.

CONSUMER SENTIMENT
The Westpac consumer sentiment index soared by 12.7% which is the biggest monthly rise in 22 years. The index is now at 17 month highs. The jump is in reaction to all the talk about 'green shoots', the stock market rise and the fact that we dodged a recession as defined by 2 qtrs of -ve growth. All good for confidence. However, Westpac's chief economist, Bill Evans, on the news last night talked it down saying there is still the possibility of two qtrs of negative growth this year. "It's possible that the technical elements that worked for the last figure could work against the next GDP figures."