Australia 10Y Bond Yield Hits 28-month High

Australia’s 10-year government bond yield hovered around 5%, trading in a sideways range near multi-decade highs as investors continued to monitor developments in the Middle East war. US President Trump issued an ultimatum for Iran to reopen the Strait of Hormuz, warning of strikes on bridges and power infrastructure if Tehran failed to comply, while Iran rejected the demand and a mediated ceasefire proposal, keeping geopolitical risk elevated. Domestically, momentum weakened, with services PMI posting its sharpest drop since November 2023 and the composite index slipping into contraction in March for the first time in around 18 months. However, earlier data showed resilience, with household consumption rising in February and job vacancies up 2.7% over three months to February, signaling a still-tight labour market. Household spending, which makes up more than half of GDP, remains central to the Reserve Bank's policy. Markets now price a two-in-three chance of a rate hike in May.

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. 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 also issued a renewed deadline and ramped up threats targeting Iran’s power plants and civilian infrastructure, while Iran rejected the demands and continued strikes across regional energy assets. Economists already 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.