Australia 10Y Bond Yield Hits 27-week High

Australia’s 10-year government bond yield dropped to around 4.8%, hitting its lowest level in twelve weeks as markets sharply reduced expectations for further rate hikes amid signs that earlier monetary tightening is beginning to filter through the economy. This comes after a softer-than-expected April inflation print and weaker consumer spending data earlier this week, as well as recent signs of cooling in the labour market, prompted investors to sharply cut the odds of a June rate hike to just 5%. Markets still price in a 70% probability of one final move to 4.6% in the last quarter of the year. Attention now turns to a raft of economic data next week, including the final manufacturing PMI survey, the trade balance, and key GDP numbers, which will provide further clues on the economy’s health. Elsewhere, reports of a preliminary agreement between the US and Iran, including the potential reopening of the vital Strait of Hormuz, weighed on oil prices and lifted global risk sentiment.

Australia’s 10-year government bond yield traded around 4.9%, hovering near five-week lows as softer-than-expected inflation print reduced expectations of further rate hikes. Data showed April's monthly CPI eased to 0.4% from a seven-month high of 1.1%, while the annual rate slowed to 4.2% from 4.6%, below expectations of 4.4%, partly reflecting a government fuel tax cut. However, underlying price pressures remained sticky, with the trimmed-mean measure of core inflation rising 0.3% on the month, in line with forecasts, and 3.4% year-on-year, marking the highest since late 2024 and further above the Reserve Bank’s 2–3% target band, as higher oil prices due to the Middle East conflict fed through the broader economy. Still, markets sharply scaled back tightening expectations, with swaps now pricing a 96% chance of the central bank holding the cash rate at 4.35% in June, up from 84% before the data. Pricing for an August rate hike was also reduced to 24% from 45% previously.

Australia’s 10-year government bond yield rose above 4.9%, attempting to recover from a six-week low as fresh US strikes on Iran dampened hopes for a peace deal, while markets awaited key domestic inflation data. April CPI due this week is expected to show consumer prices rising 0.6% month-on-month, with annual inflation easing slightly to 4.4% from 4.6%, largely due to a government fuel tax break. However, the RBA’s preferred trimmed mean measure is forecast to accelerate to 3.4% annually from 3.3%, reflecting rising transport and logistics costs across a broad range of industries. A stronger inflation reading could strengthen the case for further policy tightening, although markets currently assign only a 10–12% chance of a 25-bp rate hike in June, while the odds of an August increase stand near 50%. Elsewhere, oil prices advanced after reports of fresh military strikes in Iran clouded prospects for an interim agreement between Tehran and Washington to reopen the Strait of Hormuz.