BOND
| Close | Previous Close | Change | |
|---|---|---|---|
| Australian 3-year bond (%) | 3.366 | 3.353 | 0.013 |
| Australian 10-year bond (%) | 4.301 | 4.310 | -0.009 |
| Australian 30-year bond (%) | 5.003 | 5.012 | -0.009 |
| United States 2-year bond (%) | 3.780 | 3.826 | -0.046 |
| United States 10-year bond (%) | 4.285 | 4.335 | -0.050 |
| United States 30-year bond (%) | 4.748 | 4.788 | -0.040 |
LOCAL BOND MARKETS
Australia’s 10-year government bond yield was flat to finish 4.34%, after two consecutive days of declines, as risk sentiment improved after some U.S. trade policy relief. The 2-year increased 4 bps to 3.34%. Quite the term premium. President Donald Trump is now looking into possible exemptions on existing auto tariffs, after temporarily exempting certain tech products from reciprocal tariffs.
On the monetary policy front, minutes from RBA’s April policy meeting highlighted uncertainty around the timing of the next interest rate adjustment. While the board noted that the May meeting would be an appropriate time to reassess policy, it emphasized that no decision had been predetermined. Still, markets remain fully priced for a 25bps rate cut in May, with some assigning around a 30% probability of a half point move. Investors now await the release of the March jobs report on Thursday to assess the health of the labour market and its potential influence on the RBA’s next policy steps.
One by one, economists are abandoning their interest rate forecasts for next month after US President Donald Trump upended financial markets with his “liberation day” tariffs. Earlier this month, a dozen were tipping the RBA would keep rates on hold in May. Today, just four are sticking with that view. Money markets are fully priced for a standard quarter of a point cut at the RBA’s next policy meeting on May 20 and are pricing in a 34% chance of a jumbo half-a-point move.
| Figure X: Australian 10-year Bond Yield – Bang for Risk Buck |
US BOND MARKETS
For bond and equities markets in the US, it was a Jerome Powell speech at the Economic Club of Chicago that triggered the main moves of the day. The key comment from Jerome Powell, and it was exactly when the market started to sell off, was when the Fed said it may have a problem with it’s dual mandate this year. Specifically, he stated that the economy will likely be “moving away” from both of its goals “probably for the balance of this year.” That is, higher inflation and higher unemployment (a stagflation scenario, and was written all over the conversation) and which would put the Fed between a rock and a hard place. He also stated that there is uncertainty about tariffs would lead to a one-off price impact or that the price impact would be more persistent. And finally, he reiterated that, with the current employment and inflation levels, the Fed is in no rush to move on rates. So, forget any Fed put, at least in the short term.
The yield on the US 10-year Treasury note slid below 4.29%, a one-week low, down 5 bps. The 2-year was down 8 bps to 3.78%. Not sure, I didn’t hear an interest rate cut message from Powell.
Regarding Figure 1 below, long-term bond yield reflects inflation. Short-term bond yields are tools used to predict the Fed’s interest rate policy. Spread between the two represents four cycles of an economy. 1. Growth: Short-term yield rises as interest rates rise. Spread narrows. 2. Slow growth: Central bank raises interest rates faster and short-term yield exceeds long-term yield. Spread turns negative. 3. Recession: High interest rates lead to more defaults. Inflation caps consumption. Central bank lowers interest rate to stimulate the economy and short-term yield falls. Spread widens. 4. Recovery: Central bank continues easing. Spread remains wide and yield curve remains steep.
But there is something odd going on. The 10/2yr CDS swap spread is half that of bonds 10/2 yr spread. The theory is, given that the 10-year bond is priced by global players, it indicates technical or funding stress in the bond market. That is, global selling.
| Figure 1: Term Premium Blow Out – Funding Stress? |
Finally, Figure 2, and look at the break down in historic correlations recently between the USD and US bond yields. Only in the year leading up to the GFC have we seen anything like it. But is there a reserve currency alternative? 60% of global trade invoices are written in USD. But the rise of trading blocks may have an incremental impact.
Regarding the chart, US Credit Spread = Merrill Lynch CCC-grade High-yield Bond Yield – US 10-year Government Bond Yield (risk-free interest rate). Credit spread reflects the market’s expectations for future corporate default risk. Credit spread also serves as an indicator of USD liquidity. When USD lending and borrowing conditions tighten, investors demand higher returns on high-yield corporate bonds, causing the credit spread to widen and the dollar to appreciate due to constrained liquidity. Conversely, in a looser lending environment, the credit spread narrows, leading to dollar depreciation.
| Figure 2: USD De-Dollarisation? |
