The Australian sharemarket is set to rise on Monday despite investors on high alert for any contagion spreading from a volatile global bond market into equities.
Futures indicate the S&P/ASX 200 will open 0.3 per cent higher, extending Friday’s rally when the market rose 0.7 per cent.
Australian shares could be boosted by a positive lead from Wall Street, which rose 0.7 per cent on Friday (Saturday AEST) as slower-than-expected US jobs growth data resulted in traders paring back their bets on a Federal Reserve rate rise.
While this eased market pressure, investors remain jittery as US Treasuries have suffered a months-long rout that briefly pushed yields on 10-year government bonds, a benchmark for the cost of borrowing worldwide, to 5.34 per cent last week, the highest since 2002.
Meanwhile, the yield on the Australian government’s 10-year bonds last week hovered around 5.40 per cent, putting it near its highest level since 2011.
Those yields have risen as Brent crude prices have surged, creating expectations that inflation will be difficult to bring under control. Oil traded for nearly $US103 a barrel on Friday in New York.
Investors have long feared that soaring bond yields will spill over into equity markets. But this has yet to materialise, with Wall Street pushing more than 15 per cent higher in the last six months, while the ASX 200 has traded flat.
Wilson Asset Management portfolio manager Matthew Haupt said that unless the oil price eases and then helps to cool down global bond markets, then the sharemarket will inevitably come under pressure.
For this reason, he will be closely watching the auction of Japanese 10-year government bonds on Tuesday and US 10-year bonds on Wednesday.
“It’s a really fine line at the moment – it could go either way,” Haupt said. “Normally bond market volatility spills over into equity markets. So everyone is on red alert. We’re really trying to get our heads around if there is going to be contagion from this bond market volatility. It hasn’t spread into equities quite yet.”
On Sunday, Treasurer Jim Chalmers told the ABC’s Insiders program that rising borrowing costs driven by bond yields would add “some billions of dollars” in pressure to the budget.
But in an interview with Axios, US Treasury Secretary Scott Bessent said that the recent rise in US Treasury yields was in line with global trends and did not warrant consternation.
“I would be concerned if we were having some kind of idiosyncratic rise,” he said. “We’re not seeing people selling Treasuries to buy German bonds or Japanese bonds. I can’t control the bond market. What I can do is get people to slow down and think.”
Bessent argued that the ripple effects of the eight-month-long Iran war had masked underlying strength in the US economy, pointing to “strong” consumer spending and median wage growth in line with headline inflation.
The secretary also dismissed concerns about a bubble driven by artificial intelligence, arguing that key players such as Microsoft, Alphabet, and Meta were investing billions and generating significant revenue growth for developers including Anthropic and OpenAI.
“We’ll get to the other side of this Iran conflict. I think oil is going to be more well-supplied,” Bessent said. “The energy shock will fade away.”
In a relatively light week in terms of market-moving data, traders will also keep an eye out for the release of the minutes from the Fed’s September policy meeting when the world’s most important central bank voted unanimously to raise the benchmark rate by a quarter of one percentage point.
This marked the Fed’s first hike since 2023. On the other hand, the Reserve Bank of Australia has embarked upon an aggressive rate-hiking cycle to stave off inflation, and last week lifted the cash rate for a fourth time this year to 4.6 per cent, the highest level since 2011.
Betashares chief economist David Bassanese said that investors would be looking for clues in the Fed’s minutes about how many central bank officials favour further rises. And this, he said, echoing Haupt, came as the big question was whether rising bond yields would finally bite global equities.
“Equity markets are trying hard to ignore downward pressure on valuations that higher bond yields should ordinarily cause,” he said.
“Helping is the fact that corporate earnings remain strong and rising bond yields in part reflect resilient global economic activity and heightened competition for funds, given the AI investment boom.”