Summary:
Directionally, Australian bond yields are totally being set by the direction of the US bond market. And that means over the course of the week the 10-year yield increased from 4.29% to 4.43%. No doubt there will be a sell off on Monday based on the soft US retail sales data and bond market reaction. The notable development in Australia came on the back of the hotter than expected Wednesday US CPI print was the drop on a expectations on a 25 basis point cut form the RBA this Tuesday. The US CPI print led, or accelerated, a reset on US interest rate policy thinking. All of a sudden, conversations are being had about the conceivability of the Fed hiking. Whatever the case, the market is now pricing in one rate cut now until December this year. The Fed lacking strategic direction on rates? Look out the RBA. And needs to be considered significantly.
As per the market, interest rates expectations regarding Tuesday declined from 95% to 90% on a 25 basis points cut. Economists are saying 75%. If you are not viewing the US CPI data and market reactions as a shot across the RBA bow, then you are not watching. We acknowledge that the interest rate transmission dynamic is different in Australia (no one is on low rate 30-year mortgages in Australia), but the US CPI print would rightly have sent a chilling message to the RBA. Tuesdays’ decision will be the biggest decision for the year, financially and, of course, politically.
Bank bill swap rates moved inconsistently this week.
| TERM TO MATURITY | CLOSING RATE | Δ WEEK | Δ MONTH |
|---|---|---|---|
| 1 month | 4.195 | -0.027 | -0.125 |
| 3 months | 4.204 | -0.006 | -0.136 |
| 6 months | 4.280 | 0.013 | -0.160 |
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 |
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.
An overnight indexed swap (OIS) is a contract that exchanges periodic fixed interest rate payments with floating interest rate payments based on an average overnight rate. These interest rate swaps are usually facilitated by brokers. The OIS rate refers to the fixed interest rate in the OIS swap contracts.
Rates on OIS swaps can also be used as an indicator of the market’s expected central bank target interest rate. Widening OIS spreads indicates that the market expects the central bank to raise the interest rate in the short term, and vice versa.
Notable weekly charts are below. So much for bonds being a safe haven – bond market volatility has exceeded the relatively benign equities market this calendar year (exclude the 1.5 days re Deep Seek). Second chart – ‘higher for longer’ just became ‘higher from here’.