AUS 10Y Yield Climbs Back Toward Multi-Year Highs

Australia’s 10-year government bond yield fell below 5.4%, pulling back from its highest level since mid-2011, despite the central bank’s fourth interest rate hike this year. In a unanimous decision, the Reserve Bank of Australia raised its cash rate by 25 basis points to 4.60% as widely expected, bringing the policy rate to its highest level in about fifteen years. The central bank has now raised rates by a total of 100 basis points this year in an effort to contain persistent inflation amid rising global energy prices stoked by the Middle East conflict. Swaps priced in a 56% chance of a follow-up move in November, while the odds of a December hike stood at 60%. Attention now turns to August inflation data due on Wednesday for further clues on the policy outlook. Meanwhile, bonds remained caught up in the global selloff amid elevated inflation risks from rising oil prices, while Treasury yields climbed to fresh multi-year highs on growing expectations of further Federal Reserve hikes.

Australia’s 10-year government bond yield climbed above 5.4%, near its highest level since mid-2011, tracking a global bond selloff. The 10- and 30-year US Treasury yields rose to their highest levels since 2007 and 2004, respectively, as stronger-than-expected US economic data and elevated oil prices fueled concerns that the Federal Reserve may need to raise interest rates further to curb inflation, following the first increase in three years last week. In Australia, data showed employment rose by a stronger 39,500 in August, well above forecasts for a 20,000 increase, while the jobless rate edged higher to 4.6%, its highest in five years, pointing to mixed labor-market conditions. The report was the final major economic release before the Reserve Bank of Australia's September 28–29 meeting, but persistent inflation risks are keeping the central bank on track for another rate hike. Markets are pricing a 95% chance of a 25-bp hike to 4.60% in September and a possible peak around 5.10%.

Australia’s 10-year government bond yield fell below 5.3%, pulling back from mid-2011 highs and tracking lower global yields as easing concerns over Middle East supply disruptions reduced inflation pressures. Oil prices continued to decline amid signs of increased diplomatic efforts to resolve the Middle East conflict and restore energy flows from the region. In Australia, hawkish comments from the Reserve Bank’s top official reinforced expectations for further policy tightening. Governor Michele Bullock said upside inflation risks were materializing and warned that higher costs could make inflation more persistent. Her remarks follow statements over the past month by senior RBA officials that inflation remains elevated and needs to ease further. Markets now priced at least two more rate hikes by the February meeting, with around 95% chance the first occurs on September 29. Investors now await the upcoming labor market data later this week for further clues on the policy outlook.