| Close | Previous Close | Change | |
|---|---|---|---|
| Australian 3-year bond (%) | 3.424 | 3.392 | 0.032 |
| Australian 10-year bond (%) | 4.341 | 4.313 | 0.028 |
| Australian 30-year bond (%) | 5.02 | 4.984 | 0.036 |
| United States 2-year bond (%) | 3.965 | 3.985 | -0.02 |
| United States 10-year bond (%) | 4.473 | 4.465 | 0.008 |
| United States 30-year bond (%) | 4.9821 | 4.9696 | 0.0125 |
Overview of the Australian Bond Market
Australia’s 10-year government bond yield rose 5 bps toward 4.34% on Wednesday, snapping a three-session decline, as investors digested the latest inflation data.
On that front, the rise in the CPI for April held at 2.4% year-on-year from the previous month (and the month before that) and a little higher than expected. Market consensus was for it to slow to 2.3%. Trimmed mean inflation, the RBA’s preferred measure of underlying inflation, inched up to 2.8% in April from 2.7% in March. The RBA’s own forecast has the trimmed mean at 2.6% by Q2.
So, inflation is at the very upper end of the RBA’s target band and proving relatively ‘sticky’. While it is wise not to read too much into a one month print, we are getting the sense that the pace and quantum of RBA cuts may be less than the market is currently pricing in. Friday’s retail sales figures are expected to provide crucial insights into consumer spending, a key factor in the RBA’s policy outlook.
On stickiness of inflation, some global companies are thinking of spreading the additional costs incurred in relation to importing goods into the US across their global networks so as to reduce price rises in the US market. If so, Australia may not be as immune to Trump’s tariffs as initially thought
Overview of the US Bond Market
Treasuries slipped as attention turned to a fresh wave of supply after recent offerings signaled softer demand for government paper. A 40-year bond sale in Japan met the weakest demand since July. US auctions Wednesday are focused at the shorter end of the curve, including a $70 billion sale of five-year notes. Traders will also keep an eye on the FOMC minutes, which are likely to continue reflecting officials’ wait-and-see approach to monetary policy. Money markets see around a 70% chance that US policymakers deliver a quarter-point cut at the September meeting, based on swaps pricing.
The yield on the US 10-year Treasury note rose 5 bps to 4.50%. The 30-year rose 4 bps to 5.0%. Both levels are important psychological levels – 5.0% and above on the 30-year typically attracts additional demand for the all-in yield.
Government bond issuance is under scrutiny globally after a string of weak auctions in the US and Japan. We discuss yesterday’s 40-year auction sale in Japan below but in the US auctions Wednesday are focused at the shorter end of the curve, including a $70 billion sale of a new five-year note. Wednesday’s auction of five-year notes spotlights a maturity that’s a sweet-spot among investors given it’s less sensitive to monetary and fiscal policies than shorter and longer notes, and follows solid demand for a two-year auction on Tuesday.
Investors were on tenterhooks Wednesday Australia time for an auction of 40-year Japanese government bonds as volatility in the nation’s yields continues to rumble through global debt markets. The sale was seen as a key test for longer-maturity bonds amid concern from Tokyo to New York that rising government spending will take budget deficits into dangerous territory. The challenges in Japan’s bond market are amplified by the central bank rolling back its purchases and reluctance of institutional investors to fill the gap.
Super-long JGBs rallied Tuesday, sending yields on the 40-year maturity down 25 bps on signs that the finance ministry may be prepared to adjust debt issuance to ease the turmoil. The moves in Japan — which
followed aggressive upward pressure on global borrowing costs last week — pulled yields lower on long-tenor debt from the US to Germany, and spilled over into currency trading.
The bad news? The auction was met the weakest demand since July, adding pressure on the government to reduce issuance. The average bid-to-cover ratio, a measure of demand, for Wednesday’s ¥500 billion ($3.5 billion) auction of March 2065 bonds was 2.21. That was lower than 2.92 at the last auction in March. The 40-year yield rose 5 bps following the sale, to 3.335%, while the 30-year rate jumped 7 bps.
The fact yesterday’s Japanese auction didn’t go very well supports the narrative that the government will adjust its issuance of super-long bonds, i.e. reduce supply and go shorter in the curve. The moves followed aggressive upward pressure on global borrowing costs last week that drove up yields on long-maturity debt from the US to Japan. In that context, Wednesday’s sale was a key test globally for longer tenors amid concern that rising government spending will take budget deficits into dangerous territory. In Japan it was also being viewed as an important gauge of appetite from large institutional investors, who have not filled the gap left by the central bank reducing its purchases.
While tariff-related anxieties are easing, market concerns about US debt persist. As Congress debates debt issuance for the second half of the year, Moody’s recent downgrade reignited worries. The real challenge lies in how to address the high interest costs created by the US’s current $36 trillion debt, alongside the House’s newly passed legislation that would add another $3 trillion to the deficit over the next decade.
Trump will likely continue to use tariffs as a means to offset debt growth. According to estimates from the Yale Budget Lab, a 10% reciprocal tariff would suffice to offset 80% of the deficit increase. Thus, tariffs need not be excessive but cannot be absent entirely—this explains why Trump emphasized 10% as a baseline during UK negotiations. If future debt issuance can be managed, the immediate concern shifts to the risk of interest payment defaults, which hinges on the Federal Reserve’s actions.
It is estimated that given the current pace of Treasury refinancing, a single Fed rate cut (25 bps) could reduce annual interest expenses by roughly $27 billion (with total current interest outlays at approximately $880 billion). This is a key reason why Trump is pressuring the Fed to cut rates. At its May meeting, the Fed remained inclined to its wait-and-see approach, but it is generally anticipated that in the second half of the year, as rapid inventory restocking slows economic growth, the Fed may cut rates or even pause quantitative tightening to ease interest payment pressures.
