Australia 10Y Yield Rises After Hot Inflation Data

Australia’s 10-year government bond yield rose above 5%, moving back towards multi-year highs as markets dialed down expectations for a quick end to the Middle East conflict after US President Trump's address. Oil prices rose after Trump said Washington’s core objectives in the conflict were nearing completion, but gave no clear timeline for ending the war, while warning that the US could still strike Iran “extremely hard” over the next two to three weeks. He added that the US did not need the Strait of Hormuz, suggesting it would reopen naturally once tensions ease, though concerns over the waterway kept energy markets volatile. Economists warned that higher energy costs are set to lift inflation, forcing downgrades to growth forecasts and raising expectations of further RBA rate hikes as stagflation risks increase. Markets are pricing about a 70% chance of a 25bp hike to the RBA’s 4.1% cash rate in May, with rates expected to peak around 4.6% by September.

Australia’s 10-year government bond yield fell below 5%, easing from multi-decade highs to a two-week low as investors grew increasingly concerned about the Middle East war’s impact on the global economy. Now in its fifth week, the conflict has rattled global markets and raised fears of a simultaneous spike in inflation and slowdown in growth. While hopes of a possible de-escalation emerged after President Trump said US forces could end operations in Iran within two to three weeks, oil prices remained supported on concerns that a US withdrawal could leave the Strait of Hormuz unsecured, raising risks to one of the world’s key oil shipping routes. For Australia, this raises the risk of further policy tightening, with inflation already above target before the war began. Markets currently imply around a 65% chance the central bank could hike again at its next meeting on May 5, but have lowered the expected peak to 4.66% from 4.75% early in the week.

Australia’s 10-year government bond yield fell to below 5% on Tuesday, but remained near its highest since July 2011 as markets weighed the Reserve Bank’s latest minutes. The central bank signaled uncertainty on the future path for interest rates after two rate hikes this year, due to concerns over the Middle East war. The board acknowledged the need to balance the material bearing of a longer conflict on both inflation and economic activity. Markets currently price in a 60% chance of another rate hike in May, with around 65 bps of additional tightening expected this year. First-quarter inflation data, labour market figures, and monthly consumer spending indicators due in April will be key inputs ahead of the next policy meeting. Meanwhile, Treasurer Jim Chalmers said the economy is unlikely to contract in the second quarter even as activity slows, contrasting with some economists’ forecasts of a contraction driven by higher rates, rising fuel costs, and weaker consumer confidence.