| Close | Previous Close | Change | |
|---|---|---|---|
| Australian 3-year bond (%) | 3.362 | 3.317 | 0.045 |
| Australian 10-year bond (%) | 4.215 | 4.092 | 0.123 |
| Australian 30-year bond (%) | 4.897 | 4.775 | 0.122 |
| United States 2-year bond (%) | 3.703 | 3.738 | -0.035 |
| United States 10-year bond (%) | 4.310 | 4.157 | 0.153 |
| United States 30-year bond (%) | 4.801 | 4.594 | 0.207 |
LOCAL BOND MARKETS
Australia’s 10-year government bond yield rose by a substantial 16 bps to 4.26%, mirroring overnight moves in the US bond market. More interestingly perhaps, the more policy sensitive 2-year government bond fell 8 bps to 3.33%, reflecting the reset regarding RBA policy settings.
Deutsche Bank is the first forecaster to call for a 50 bps cut by the RBA in May. “Unless the US administration tilts to an ‘off ramp’ within days on its tariff policy, we expect the RBA to lower rates by 50 bps in May,” Phil O’Donoghue, chief economist for Australia at Deutsche Bank. “We then expect another 50 bps of cuts in the second half (25 bps at each of the August and November meetings), taking the cash rate to 3.1% by the end of 2025.” The shift comes as markets are pricing in a 25% chance of an outsized, 50 bps cut at the RBA’s next meeting on May 20. Money markets are fully priced for a standard 25 bps move.
As for the market, it is now ascribing a 15% probability of a 50 bps cut at the May meeting. The market significantly repriced rate expectations on Monday, now fully priced for a 25 bps easing at each of the RBA’s next policy meetings in May, July and August, and expect even more will follow later in the year. A few market participants have even suggested the RBA may make an out of cycle rates decision. When certain market players start talking about inter-meeting rate cuts, you know things are truly breaking down.
RBA Gov Bullock’s speech on Thursday (at 8pm AEST) will get great attention and ironically a hawkish stance could feasibly accelerate the selling in the AUD.
US BOND MARKETS
US Treasuries fell Tuesday after the wildest day for bond traders since the height of the pandemic in March 2020. The decline pushed yields on 10-year US bonds up 10 bps to 4.28%, after a volatile start to the week in which early gains gave way to steep losses. German rates also climbed, and UK long-end yields edged higher after Monday’s surge, the biggest since the one unleashed in 2022 by then-Prime Minister Liz Truss’ proposed budget.
Regarding Monday’s trade (10-year yields moved whopping 35 bps), traders have posited an array of reasons for Monday’s whiplash: a market primed for a pullback after such a sharp rally; lurking concerns about tariffs stirring inflation or necessitating government stimulus; liquidations in favour of cash-like instruments; and rumours that foreign owners, including China, were selling. We would posit another one – rebalancing of portfolios away from US assets. Most concerningly, this could be an early sign that investors are looking to liquidate positions even in high-quality assets to raise cash. That seems to be what has been happening with gold over the last several days.
Meanwhile, in high yield corporate bonds, JPMorgan Chase & Co. warns that the high-yield bond slump is about to get worse due to the implementation of high tariffs on many US trading partners and a predicted US recession in 2H25. The bank’s strategists have raised their spread forecasts and made changes to sector recommendations, including increasing estimates on their proprietary gauge for the extra yield investors will demand to own high yield bonds instead of Treasuries.
JPMorgan increased estimates on their proprietary gauge for the extra yield, or spread, investors will demand to own high yield bonds instead of Treasuries to 550 bps by the end of the second quarter, compared to 459 bps on Friday. High-yield bond debt spreads ended Monday at 449 bps, the widest in 22 months. This follows UBS Group AG strategists now expecting corporate-bond spreads to reach levels last seen during the early part of the pandemic.
The strategists also widened their spread projection for investment-grade debt by 35 bps to 125 bps while noting their forecasts weren’t as dire as prior recession levels. The good thing about corporate debt is it enters this period of slower growth with strong credit metrics and ratings, low default rates, light refinancing needs, ample liquidity/cash in investor hands and supportive technicals more broadly. But downgrade risk is definitely a risk.
There are concerns that the high yield market is papering over recession risks, with the strong technicals leading to passive investors (ETFs or maturity funds) blindly buying. On a historic basis, spreads are still in very good shape. Typically, a high yield bond spread of 800 bps is seen as presaging a recession. Even after the recent selloff, they are less than half of that on both sides of the Atlantic. A model by JPMorgan strategists showed in mid-March that the S&P 500 was pricing a 33% probability of a US recession, up from 17% at the end of November, while credit was only pricing in 9% to 12% odds. Call it Gray Swan risk — a shock that is predictable in theory, but largely ignored until it hits.
