Summary:
The Australian yield curve has been steepening as the market is pricing in both more rate cuts and with greater certainty. We’re not sure that there isn’t degree of overshoot here by the markets.
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Exhibit 1: Australian 10-yr minus 3-year Spread |
Bond traders are betting that tariffs are inflationary in the short term but disinflationary in the long-term. While the one-year inflation swap has surged to about 3.4%, the 5y5y forward, which tracks longer-term inflation expectations, has dropped to 2.3%, the lowest in almost three years.
It makes sense. If the tariff wall is built up around the world, and you have to duplicate the supply chain, ultimately, the global economy will be flooded with products and put downward pressure on prices, eventually.
So, the yield curve actually steepened flattened slightly over the back end of the week, suggesting potentially the bond market is more concerned about the inflationary impacts versus the growth impact of the tariffs. Or, it may also come on the back of comments from Jerome Powell on Friday that the Fed will likely be on hold until it gets more transparency on the impact of tariffs.
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Exhibit 2 US 10-yr minus US 2-yr Spread |
To find out more about the yield curve and its usefulness, click here or here.