| Close | Previous Close | Change | |
|---|---|---|---|
| Australian 3-year bond (%) | 3.349 | 3.254 | 0.095 |
| Australian 10-year bond (%) | 4.292 | 4.350 | -0.058 |
| Australian 30-year bond (%) | 4.988 | 5.063 | -0.075 |
| United States 2-year bond (%) | 3.8371 | 3.773 | 0.064 |
| United States 10-year bond (%) | 4.468 | 4.372 | 0.096 |
| United States 30-year bond (%) | 4.9229 | 4.850 | 0.073 |
LOCAL BOND MARKETS
Australia’s 10-year government bond yield fell to around 4.30%, reversing gains from the previous session as expectations grew for a more accommodative stance from the RBA. This comes amid escalating US-China tensions, which pose risks to Australia’s export-dependent economy, especially with China being its largest export market. President Trump raised tariffs on Chinese imports to 145%, effective immediately, just hours after China increased duties on US goods to 84%.
This, coupled with recent data showing subdued business and consumer confidence, reflecting concerns over economic weakness and growing global uncertainty, has bolstered speculation of a more lenient RBA. Swaps now fully price in a quarter-point rate cut from the RBA in May, with some speculating a larger 50 basis point reduction. A total easing of 120 basis points, equivalent to about five rate cuts, is expected over the course of this year.
Speaking for the first time since Trump announced a sweeping set of global tariffs last week, RBA Governor Michelle Bullock sought to project calm on Thursday evening. “It will take some time to see how all of this plays out, and the added unpredictability means we need to be patient as we work through how all of this could affect demand and supply globally,” Bullock told Chief Executive Women Melbourne’s annual dinner. That is, it’s too early to start cutting rates.
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.
US BOND MARKETS
There’s a stark divergence at play across the Treasury market and it’s the new playbook for rates traders at the moment. The 2-year yield is trading 10 basis points lower at 3.85%, while the 30-year bond is 10bps higher and near its session peak of 4.87% (54 bps over the last 5 days!!!). The yield curve has steepened massively. The logical explanation is that a softer CPI print favours the front end and eventual Fed rate cuts, while the market builds in a big concession before Treasury sells $22 billion of bonds at 1 p.m. This kind of price action is hardly reassuring given this week’s wild swings amid a massive liquidation trade in Treasuries. Private foreign buyers own a ton of US duration risk. It would be hardly surprising that foreign buyers are at least on hold in terms of buying, if not selling. Furthermore, trading desks currently have over $400bn of long dated treasuries on their books, the highest ever – they had no capacity to buy on the market.
During the day, the 30-year auction had weighed on the long-end as people are still worried about a buyers’ strike, particularly foreign buyers. However, the carefully watched 30-year bond auction today was met with stronger demand than expected. This may provide a little more confidence about foreign demand for US treasuries after concerns that foreign investors were exiting the market. There was also several investment grade issuance today. The key point is that the credit markets are continuing to function well enough.
On the macro front, underlying US inflation cooled broadly in March, indicating some relief for consumers prior to widespread tariffs that risk contributing to price pressures. Inflation came in notably weaker than expected for last month, with the headline CPI falling 0.1% — thanks in part to a tumble in gasoline prices. The rise was the least since last July. No economic forecasters had predicted a drop. On an annual basis, core inflation ran at 2.8%, the least since the breakout in inflation in the spring of 2021.
While the March CPI pre-dates the bulk of the tariff hikes now implemented by the Trump administration — such as the new 145% surtax on Chinese goods — the report offered some encouragement that price gains were stabilizing ahead of the trade moves. Two-year Treasury yields slid in reaction to the data, falling as much as 11 basis points to the lows of Thursday’s session. They were down about 6 basis points at 3.85%.
Fed cut expectations have been all over the place in recent days. They went all the way up to five a few days ago, while now we are down with the market expecting about two rate cuts this year. Many strategies believe that revised expection is reasonable because the Fed is balancing sticky inflation, notwithstanding today’s moderate CPI number today, but we all know that’s backward looking. So the market needs to worry about what are tariffs going to do to inflation. And the Fed is balancing that, of course, against the economy which is slowing. And how do they balance that? The magic number will probably be around two rate cuts starting this US summer. One top JPMorgan strategist warns not to get lulled by today’s inflation numbers because we’re in the calm before the storm — and a slowdown is coming.
A thought on yesterday’s policy turnaround: Investors since the start of the year had been wondering where the “Trump put” was in stocks — how much of an equities decline was he willing to accept as he pressed on with tariff hikes that unsettled the market? That question loomed large last week, of course. Now we know that there was indeed a Trump put, except it was in the bond market, not stocks. And really the signs were there. Bessent already had been highlighting the importance of 10-year Treasuries as the benchmark from a borrowing-cost angle. As for Treasuries as a financial-stability gauge, Vice President JD Vance worried already even before the election, back in September, that some investors might “try to take down the Trump presidency by spiking bond rates.” Vance highlighted a “bond market death spiral” dynamic that hit the UK in October 2022 as a sort of worst-case scenario. And indeed, investors were making that analogy with the “Liz Truss moment” this week.
Corporate credit markets took a hit Thursday, with CDS index spreads blowing out as Wednesday’s relief rally fades. The spread on the Markit CDX North American Investment Grade Index, which rises as perceived credit risk climbs, is up more than six basis points today, the most on an intraday basis since Friday. Credit-focused ETFs are getting hit, too. The prices on funds that track high yield bonds (HYG) and investment-grade bonds (LQD) have both plunged. High yield bond losses were led by the energy sector, which is dragged by falling oil priced and the highest funding costs in almost five years. The return of issuers to the high-grade market shows there’s a bid for relatively fat yields on debt from quality companies, and follows advice from bankers to CFOs that they should move quickly when any funding window opens. Elevated risk of recession and stubborn inflation keeps pressure on weak borrowers though, boosting the odds of more defaults and restructurings to come.
One risk asset which didn’t rebound Wednesday was US leveraged loans, where prices by one gauge finished at a fresh 21-month low. The market has seen no new deals emerge in two weeks, while at least two have been postponed by banks, and several others have struggled to generate sufficient investor interest. Leveraged loans were one of the hottest credit plays of 2024, returning about 9%. But investors have pulled cash from the sector each week the past month on worries about how lower-rated securities could fare in the current climate. Leverage loan funds have seen record outflows over the past week as the asset class is highly exposed to default risk as the tariff war goes on. Borrowers in that market face an extended period of elevated funding costs and a likely earnings slump, undermining their ability to repay debt.
Finally, a new income tax survey from ACI Worldwide, a global payments technology firm, found that nearly 40% of taxpayers are likely to use their tax refund to pay debt (e.g., credit cards, loans, etc.) down this year, and 44% of respondents chose to save their tax refund. That leaves little for consumer spending that many firms have come to rely on around tax season. The data suggests a growing sense of financial caution and declining economic optimism in the US.
