AUS 10Y Yield Trades Near Multi-Decade Highs

Australia’s 10-year government bond yield held above 5%, moving near its highest level since July 2011 as a global oil shock tied to the prolonged Middle East conflict intensified inflation risks and clouded the economic outlook. Oil prices continued to climb as the conflict in Iran entered its fifth week, with renewed attacks in the region increasing risks to global energy supply. In response, Australia's Prime Minister Anthony Albanese announced a temporary cut to fuel taxes to help ease cost pressures, underscoring the broader impact on the economy. Focus now turns to the release of the Reserve Bank’s March meeting minutes after a narrow vote to raise rates to 4.1%, with investors watching how policymakers balance persistent inflation against slowing growth, especially as fuel shortages have emerged in parts of the country. Economists are increasingly cautious, with some warning of a potential second-quarter contraction as higher rates and energy costs weigh on consumption.

Australia’s 10-year government bond yield rose to around 5%, attempting to climb towards more than multi-year high after the RBA flagged inflation threat from a global oil shock as Middle East tensions persisted. The central bank warned that a global supply shock from the war could lift inflation and long-term expectations, particularly amid persistent capacity pressures. Assistant Governor Chris Kent noted that such shocks could weigh on economic growth, limiting the ability of policy to fully offset the impact and instead shifting the focus toward preventing inflation from becoming entrenched. Markets now price a May rate hike at over 70%, up from roughly 60% on Wednesday. Meanwhile, conflicting signals from the US and Iran over potential negotiations kept oil prices elevated. While Washington indicated efforts to advance talks and ease tensions, Tehran pushed back against ceasefire proposals, and increased US troop deployments in the region added to fears of further escalation.

Australia’s 10-year government bond yield fell below 4.95% on Wednesday, easing from multi-decade highs as oil prices retreated on hopes for a Middle East ceasefire, while domestic inflation data had little impact on the outlook for interest rates. Data showed consumer prices were unchanged in February, easing the annual inflation rate to 3.7% from 3.8% the prior month. Core inflation also came in slightly below expectations at 3.3%, though it remained above the Reserve Bank of Australia’s 2%–3% target range. Markets are pricing in about a 50% chance that the central bank will raise its 4.1% cash rate at the May 5 meeting, with rates potentially reaching as high as 4.75% by year-end. Meanwhile, oil prices declined after reports that the US was pursuing diplomatic efforts to end the war with Iran, including a proposed one-month ceasefire and a 15-point plan to resolve the conflict. However, investor skepticism persisted after Tehran denied engaging in any negotiations with Washington.