Summary:
Just as we noted previously, directionally, Australian bond yields have since the beginning of the year being set by the direction of the US bond market. Tuesday provided no better indication than this. Despite the RBA cut, the 10-year government bond yield and, more notably, the more interest rate policy sensitive 2-year government bond yield increased 10 and 9 basis points, respectively. Over the course of the week, yields on the 10-year note increased 5 basis points to 4.50% after peaking at 4.57% earlier in the, near its highest level in over a month.
Flash PMI figures released on Friday indicated continued expansion in Australia’s business activity in February, supported by growth in both manufacturing and services sectors. Meanwhile, earlier data released on Thursday showed that the country’s labour market remained strong in January, complicating the case for further interest rate cuts.
Following the hawkish commentary from the RBA on Tuesday and again Thursday, the market materially repriced interest rate expectations. The market is now implying only a 10% probability of another rate cut in April and suggests just 40bps of easing for 2025, equivalent to fewer than two rate cuts.
So what we can probably take away from last week is that Australian government yields are likely to remain range-bound over the foreseeable future, and at elevated yields, given the tenor of the economic data we are seeing. Australia currently is not unlike the US – we are seeing a tug of war between what generally solid and resilient economic data release is yet weak-ish consumer and business sentiment.
Bank bill swap rates moved inconsistently this week.
SWAP RATES
| TERM TO MATURITY | CLOSING RATE | Δ WEEK | Δ MONTH |
|---|---|---|---|
| 1 year | 3.888 | -0.047 | -0.209 |
| 3 years | 3.826 | 0.058 | -0.216 |
| 5 years | 3.943 | 0.053 | -0.227 |
| 10 years | 4.418 | 0.061 | -0.204 |
| 15 years | 4.622 | 0.059 | -0.202 |
Furthermore, it is the elevated yield levels that have been fund manager demand for Australian government and corporate bonds. Over the last few weeks we have noted the very high levels of oversubscription for both bond types, and notwithstanding the historically narrow spread levels. It is the latter that is the ‘tail’ risk for bonds, here in Australia and the US.
See chart below. Bets are still on for a rate cut but moderated this week. In terms of the chart, the overnight indexed swap spread is the difference between the interest rate on long-term overnight indexed swaps (3-Month OIS Rate) and 1-month overnight indexed swaps.
AU and US Bond Yields SpreadWhat the chart below highlights is just how much the Australian bond market is tracking and mirroring the US market. And that also means the Australian bond market has been exhibiting a high degree of volatility since the start of the year. In fact, bond volatility has been materially higher than equities volatility.
