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No Country for Bond ETF Investors


The yield on 10-year U.S. Treasurys was 2.13% on June 3. That number surged to 2.6% as of Tuesday’s close, fueling chatter that a 30-year bull market for bonds has become a bubble that is perilously close to popping.

Rising Treasury yields are not good news for bond bulls and the situation is even more trying because bond markets outside of the U.S. are providing no refuge. Plunging currencies in ex-U.S. developed and emerging markets are chasing investors out of global bonds, including those of AAA-rated Australia. [Plunging Aussie Not Helping Equity ETFs]

The well-documented decimation of the Australian dollar has sent yields on Australian sovereign debt soaring while sending the PIMCO Australia Bond Index ETF (AUD) tumbling. In the past month, AUD is down 6.5%, a loss that is far worse than the 4% dropped experienced by the CurrencyShares Australian Dollar Trust (FXA) .

The rise in yields on Australian 10-years over the past month mirrors that of the June increase in the comparable Treasurys. Yields on those Australian bonds have jumped 49 basis points in the past 30 days and nearly 80 basis points in the past year, according to Bloomberg data. Pressuring the Aussie and AUD even further have been bearish comments on the currency from hedge fund legends George Soros Stanley Druckenmiller. In fact, the short Aussie trade has become a hedge fund favorite in recent months. [Aussie ETF Falls as Soros, Druckenmiller Turn Bearish]

Muddling the outlook for AUD and Aussie-denominated debt are multiple factors. First, the Reserve Bank of Australia has not been shy about cutting interest rates in an effort to boost the world’s 12th-largest economy. RBA cut rates to a record low of 2.75% last month. A year ago, Australia’s benchmark interest rate was 3.75%. When AUD debuted in October 2011, Australia had the second-highest borrowing costs in the developed world. [PIMCO Launches Australian Bond ETF]

Second, the end of U.S. easing activities has been a drag on riskier currencies. That is how the market perceives the Aussie despite Australia’s AAA credit rating. Additionally, investors have been attracted to Australia’s close ties to emerging Asia’s rapid growth and demand for commodities, but those themes have dried up and plagued the Aussie in the process.

While AUD has an effective duration of 4.41 years, putting the ETF in the intermediate area of the duration spectrum, the fund is still sensitive to action in Australian 10-years. For example, the ETF sank on Monday when the yield on Australian 10-years crossed for 4%, touching its highest levels in more than four years. On Tuesday when those yields drop 24 basis points, AUD surged 3.6%.

With more rate cuts and downside for the Aussie expected, bond investors may want to give AUD some breathing room for now.

PIMCO Australia Bond Index Fund

ETF Trends editorial team contributed to this report.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.