| Close | Previous Close | Change | |
|---|---|---|---|
| Australian 3-year bond (%) | 3.863 | 3.796 | 0.067 |
| Australian 10-year bond (%) | 4.468 | 4.395 | 0.073 |
| Australian 30-year bond (%) | 4.987 | 4.925 | 0.062 |
| United States 2-year bond (%) | 4.357 | 4.2896 | 0.067 |
| United States 10-year bond (%) | 4.627 | 4.5373 | 0.090 |
| United States 30-year bond (%) | 4.8321 | 4.7511 | 0.081 |
* Implied yields from September 2025 futures. As at 12th Feb.
LOCAL MARKETS
Australia’s 10-year government bond yield rose to around 4.49%, mirroring an uptick in U.S. bond yields following Federal Reserve Chair Jerome Powell’s remarks. Powell told a Senate Committee on Tuesday that the Fed is in no hurry to make further interest rate cuts with the economy sturdy and inflation still too high. This view was reiterated overnight at the House Financial Services Committee on the second day of his semi-annual testimony to Congress.
The direction of the market today will be set by the U.S. consumer inflation report issued overnight, which could provide crucial insights into the Fed’s rate path (see below).
The yield on the 10-year US Treasury yield jumped 10 basis points to 4.64% on Wednesday, extending the rebound from the seven-week low of 4.4% touched on February 5th after fresh evidence of hot inflation jeopardized the outlook that the Fed will cut rates this year. The increase in yields was across the curve, with the US 2-year increasing 8 basis points to 4.38%
Headline inflation unexpectedly rose to 3% in January, while the core gauge was much higher than expectations at 3.3% amid accelerated price growth for underlying parts of the consumer basket in shelter and transportation services. The batch of data magnified concerns that inflation in the United States is stickier than expected following the surge in inflation expectations measured by UofMich and more aggressive tariffs imposed by President Trump. Consequently, rate futures indicated expectations of a sole rate cut by the Fed this year instead of two or more before the CPI release, while one third of the market has positioned for no cuts.
The short end of the curve has now all but priced out any rate cuts. Higer-for-longer just got a little longer or has morphed into ‘higher-from-here’.
Key takeaways from January CPI result:
· The headline CPI gauge jumped 0.5% from December, the most since August 2023, exceeding all forecasts in Bloomberg’s survey of economists. The core index, which strips out food and energy, jumped 0.4% on the month, the highest reading since March, exceeding all but 5 of 73 forecasts.
· Almost 30% of the total CPI gain came from shelter costs, although both rent and homeowners’ equivalent costs rose by notably smaller magnitudes than seen in recent years. Food and energy prices also boosted inflation. Sounds all too familiar to Australia!
· Supercore services prices, which strip out housing and had been a focus for the Fed during the decades-high-inflation period, soared by almost 0.8% on the month, in a potential sign that higher wage costs are again feeding through to prices.
The Fed has been waiting for clear signs that inflation is trending lower again, but overnight it got the opposite. Many market commentators, however, believe that with this report the Fed’s cutting cycle is now over. In fact, while only one report, there is a growing view that two or three more comparable reports would mean that, while currently not likely, the possibility of a rate hike has become a little less inconceivable.
