10-Year AGB Yield Soars to 15-Year High

The yield on the 10-year Australian Government Bond surged to over 5.17% in September, the highest since 2011, and tracking the rise in global bond yields on expectations of higher interest rates by major central banks. The return of strikes between the US and Iran added to pessimism on energy supply from the Middle East and rekindled pro-inflationary risks in major economies. This magnified the impact of an overshot domestic inflation print in July, when headline inflation rose to 3.6%, ahead of expectations of 3.3%. Markets increased exposure to hedges against a incoming rate hike by the RBA after minutes from the central bank's last meeting reflected growing concerns over price growth. Global inflation also raised bets on hikes by the Fed and BoJ this year. On top of that, record corporate debt issuance, including Australian dollar offerings by Alphabet, also lifted yields.

Australia 10-year government bond yield climbed above 5.1%, hitting a five-month high amid a broad selloff in global bond markets. Treasuries led the rout amid growing concerns over US budget deficits and debt levels, while Australian bonds faced additional pressure from expectations that interest rates may need to remain elevated for longer to bring inflation under control. Markets now see a 54% chance of the RBA raising its cash rate by 25 bps to 4.60% on September 29, sharply higher than 10% a week earlier, while the probability of another hike to 4.85% stands at 40%. The more hawkish policy outlook comes despite signs of weaker economic momentum, with net exports and government spending suggesting the economy slowed in the second quarter. The Q2 GDP report, due Wednesday, is expected to show growth of just 0.3% quarter-on-quarter, while annual growth is forecast to slow to 1.8% from 2.5%. Still, core inflation remains high at 3.6%, keeping pressure on the RBA to hike rates again.

Australia’s 10-year government bond yield held around 5.1%, sitting at a five-week high as markets ramped up the odds of an imminent rate hike. The stronger outlook for tighter policy came after a hotter-than-expected July inflation report and household spending data, which showed a 1.1% jump in July, pointing to continued strength in domestic demand despite elevated borrowing costs. The RBA has already hiked rates three times this year and policymakers have warned they could tighten further. The stronger economic figures prompted several major banks to revise their RBA forecasts, with NAB expecting the cash rate to rise to 4.6% next month, while CBA and ANZ forecast a November move but acknowledge the possibility of earlier tightening. Markets are pricing roughly a 50% chance of a rate increase at the RBA’s September meeting, up sharply from 17% previously, while a November hike is fully priced in. Focus now turns to Q2 GDP and employment data for further clues on the policy outlook.