Government

Summary: .

Over the course of the week the Australian governments bonds rallied across the curve. The Australian 1-year government bonds rallied 5bps to end the week 3.41%, the 2-year bonds rallied 8bps to end the week at 3.26% while the key 10-year bonds rallied 11bps to end the week at 4.16%. 

Australian government bond yield fell to the lowest point since March 2025 in the wake of Israel’s strike on Iran’s nuclear facilities. The 10-year US Treasury yield fell to 4.314% before recovering to last trade at 4.325%, still down 3 basis points on the day. 

As noted, the US Treasury is set to sell $22 billion of 30-year government bonds on Thursday, which will be closely watched as a test of market sentiment amid investor pushback against long-term government debt. All the auctions will be viewed through the lens of a test of market sentiment. It may also be a key determinant of the yield curve over the course of the week. 

The curve is likely to steepen further over the next six to 18 months because the front end will eventually follow the Fed cuts. In contrast, in the long end there is likely only a modest reduction from here because of the budget deficit issues and what appears to be a supply/demand mismatch. So, unless the treasury cuts back on long-end issuance, the curve can continue to steepen. 

For those following the markets closely, it has been clear for all of 2025 that bond managers are favouring the shorter end of the curve (0-3 year) or the belly of the curve (5-7 years). This weight of money, or movement out the long-end, in itself may prove self-reinforcing. And given the current risks at the long-end, higher yields are likely required to entice bond investors back to that part of the curve. All in all, not great news for the real economy / main street nor is its great news for the US government’s interest expense payments.   

 

Figure 3: Australian & US Bond Yields