Australian equity markets could be negatively affected in the short-term by rising global bond yields, strategists have warned after a global bond sell-off on Thursday.
The loose monetary policy that persisted after the global financial crisis has served to keep bond yields depressed. But expectations of central bank tightening in Europe and the US saw global investors dumping bonds towards the end of last week, causing spikes in yields (bond yields rise as prices fall).
German 10-year yields rose to an 18-month high while US 30-year yields breached their 200-day moving average. In Australia on Friday,10-year bond yields jumped 7 basis points to 2.71 per cent.
The bond market is by market capitalisation many times larger than the global equities market, leaving bourses highly vulnerable to small shifts in bond markets, said Argonaut executive director of corporate stockbroking James McGlew. "So they're very important."
In a note that preceded Thursday's sharp movements, Credit Suisse equity analyst Hasan Tevfik warned that bond proxies made up 22 per cent of the ASX200 by market capitalisation.
Bond proxies tend to be defensive companies offering stable, regular yields in a similar manner to the fixed-income market. When bond yields are low, investors turn to bond proxies to mimic the characteristics of bonds in their portfolios.
"Australian equity investors have benefited considerably from lower government bond yields," he wrote. Such sectors currently trade at a significant premium to the market, and so are vulnerable to asset re-allocations should bonds begin to offer better returns.
"Aussie sectors most exposed to changes in the government bond yield are healthcare, REITs, utilities, information technology (excluding Computershare) and the three infrastructure companies (Transurban, Sydney Airport and Macquarie Atlas)," Mr Tevfik wrote.
The big four banks constitute around a third of the ASX 200 by market capitalisation, and they're vulnerable too, said Mr McGlew.
"The relative appeal of the franked dividends in the banks is diminished as rates start to rise," he noted.
AMP head of investment strategy and chief economist Shane Oliver however argued that the "taper tantrum" was likely to be temporary.
"After strong gains and signs of investor complacency shares and bonds have been vulnerable to a correction for some time," he told clients on Friday.
"The first 'taper tantrum' in 2013 which was kicked off by then Fed chair Ben Bernanke's comments around slowing or tapering the Fed's quantitative easing program saw share markets fall 6 to 11 per cent and 10-year bond yields in the US and Australia rise by around 140 basis points.
"However, we remain of the view that the latest taper tantrum will settle down. The only reason central banks have become a bit more hawkish is because global growth has improved which in turn is good for profits and shares, monetary tightening by the ECB and other central banks even when it does get underway will be very gradual (with the recent back up in bond yields and the Euro likely to further slow the ECB) and it will be a long time before global monetary policy is tight and hence threatening to shares. So expect the correction in shares to remain just that and the up-trend in bond yields to remain gradual (despite occasional spurts higher)."