Summary:
Just like the US, Australian bonds got slammed all week long. You’d think the RBA was about to raise interest rates. But there was nothing rationale about the moves in Australia this week, the market was simply mirroring the carnage and borderline dysfunction on the US market
By the end of the week, Australia’s 10-year government bond yield had risen a mere 40 bps to 4.48%. The 2-year fared much better, rising circa 20 bps over the course of the week, ending at 3.4%. This week in Australian bond markets is a classic case of financial market contagion. The issues impacting the US bond market aren’t relevant to Australia, but that hasn’t meant that the cost of financing businesses has not moved in tandem with the US markets.
On more fundamental factors, in a speech in Melbourne, Bullock stated that it is “too early” to determine how U.S. President Trump’s trade war will impact interest rates in the coming months, while downplaying expectations of a double rate cut in May. She added that the market turmoil caused by the trade conflict is not as severe as the 2008 global financial crisis.
Still, markets remain fully priced for a 25bps rate cut in May, with some even leaning toward a half-point move. This dovish tilt in market pricing was mainly due to the intensifying US-China trade war, which poses risks to Australia’s export-driven economy, particularly given China’s role as its largest trading partner. On the economic front, Australia’s consumer inflation expectations rose to 4.2% in April from 3.6% in March, reflecting concerns that the escalating trade tensions could boost inflation rate.
Despite Trump’s backdown, bond markets still bet the RBA will cut the cash rate five times this year, taking the cash rate to 2.85% by December from 4.1%. Traders ascribe a one-in-three chance of a 0.5 percentage point cut in May. NAB said it now expected the RBA would deliver a 0.5 percentage point rate cut in May and slash the cash rate to 2.6% by February 2026. In contrast, Deutsche Bank on Thursday reversed its call for a 0.5 percentage point rate cut in May, and now expects a 0.25 percentage point cut instead.
Exhibit 1: Australian 3Y/10Y Bond Yield
|
Exhibit 2: AU and US Bond Yields Spread |
Bank Bill Swap Rates
| TERM TO MATURITY | CLOSING RATE | Δ WEEK | Δ MONTH |
|---|---|---|---|
| 1 month | 4.1101 | 0.0101 | 0.0226 |
| 3 months | 4.1191 | -0.0086 | 0.0091 |
| 6 months | 4.2215 | -0.0775 | 0.009 |
SWAP RATES
| TERM TO MATURITY | CLOSING RATE | Δ WEEK | Δ MONTH |
|---|---|---|---|
| 1 year | 3.4404 | -0.0732 | -0.3681 |
| 3 years | 3.411 | 0.074 | -0.3065 |
| 5 years | 3.8923 | 0.2266 | -0.1402 |
| 10 years | 4.3935 | 0.307 | 0.0285 |
| 15 years | 4.631 | 0.342 | 0.0872 |