Investors should keep a "watchful eye" on the bonds market after a QUT economist warned its return to normality could send the stock market into a "correction cycle".
Dr David Willis, from QUT Business School, said bond yields in the US and Australia had started to increase, signalling a return to usual levels.
"The bond market yields in the US and Australia have started their move towards normality with the yields moving from 1.9 per cent to 2.22 per cent and 2.30 per cent to 2.99 per cent respectively this week," he said.
"If this trend continues, and with an interest rate rise in the US expected, this will have a negative effect on the Australian stock market - setting it up for a correction."
Dr Willis said the increase in bond yields would tempt investors and fund managers to sell off shares, potentially putting the market into a downward spiral.
"As bonds increase their yield from historical lows, investors and fund managers will reassess their risk return in their portfolios and sell off stocks in favour of a bond with a certainty of yield, especially as we are seeing a degree of volatility in the stock market," he said.
"With interest rates now low and expected not to fall further, there is little more upside in bank stocks other than the banks actually increasing profitability in a very competitive market. And with new regulations on the near horizon this seems a challenge.
"Shares in banks have a heavy weight in the ASX and any sell off of these blue chip stocks in favour of a bond will send the stock market into a possible correction cycle.
"Therefore investors in the ASX need to keep a watchful eye on the bonds market and yield as a leading indicator of where the stock market is likely to go in the medium term."
Media contact:
Rob Kidd, QUT Media, 07 3138 1841, rj.kidd@qut.edu.au
After hours, Rose Trapnell, 0407 585 901
