| Close | Previous Close | Change | |
|---|---|---|---|
| Australian 3-year bond (%) | 3.72 | 3.77 | -0.05 |
| Australian 10-year bond (%) | 4.28 | 4.34 | -0.05 |
| Australian 30-year bond (%) | 4.85 | 4.88 | -0.03 |
| United States 2-year bond (%) | 3.93 | 3.98 | -0.05 |
| United States 10-year bond (%) | 4.19 | 4.18 | 0.01 |
| United States 30-year bond (%) | 4.51 | 4.46 | 0.04 |
LOCAL MARKETS
Australia’s 10-year government bond yield fell to around 4.30%, nearing its lowest level since December, as the RBA’s meeting minutes highlighted downside economic risks. This could support a dovish stance from the central bank, which also acknowledged that current labour market tightness is inconsistent with its 2.5% inflation target. However, the RBA refrained from committing to further rate cuts despite lowering borrowing costs last month.
Meanwhile, rising global trade tensions continued to weigh on market risk appetite after the US confirmed tariffs on China, Mexico, and Canada. On the economic front, Australia’s retail sales rose 0.3% month-over-month in January, rebounding from a 0.1% decline in December.
US MARKETS
The yield on the US 10-year Treasury note fell to 4.13% on Tuesday, a level not seen since late October, as the escalating trade war raised further concerns about the economic impact of the new trade policies. A 25% tariff on US imports from Canada and Mexico, along with an additional 10% levy on China, came into effect today, and both Canada and China have already announced retaliatory measures. Mexico is due to announce measures on Sunday.
Economic data, including the ISM Manufacturing PMI, is already signalling strain on the US economy due to the impact of tariffs. Traders are now fully pricing in three quarter-point rate cuts by the Federal Reserve in 2025, reflecting expectations that the central bank will need to take more aggressive action to support the economy. This marks a shift from last week when markets had fully priced in only two rate cuts for the remainder of the year.
This repricing of rate expectations suggests traders are more focused on the economic growth risk versus the price inflation risk. What received little attention in yesterday’s ISM was the increase in prices paid. That is, a manifestation of ultimately stagflation risk. To the extent the latter transpires, there won’t be three rate cuts this year.
