AUS
NZ
UK
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Highlights
- Yields on the Australian benchmark 10-year bond have risen above 3.5%, as of 10 May 2022.
- The US Fed has hiked the interest rates by 50 basis points, which spooked the markets across the globe.
- Based on a few surveys, the cash rate is expected to rise up to 1.75% by the year end.
Bond yields are surging across the globe as central banks have started hiking interest rates in an attempt to curb soaring inflation. In the recent RBA meeting, Australia’s central bank made a bold move to ramp up interest rates by 25 basis points, 10 basis points higher than the market’s expectation.
Image Description: 10-year Australian bond yield
Image Source: EODHD/Others
Yields on the Australian benchmark 10-year bond climbed above 3% back in April 2022 as the market was deemed to be going too far in pricing the upcoming rate hikes for the year. However, after the RBA’s unexpected move of an aggressive rate hike, yields have further surged past that level and currently trading at 3.54%.
This is not just the case with Australia. The central bank of the world’s largest economy, the US Fed, has also started to move in sync with other central banks to put a leash on red-hot inflation. In the last meeting, the US fed increased the interest rates by 50 basis points which spooked the markets across the globe, especially the high-flying tech stocks.
Read More: What NAB and Macquarie’s outlooks imply about Australian economy
With central banks going all guns blazing to slow down the heated economy, investors are discounting a period of aggressive rate hikes this year, leading to a massive liquidation of current bonds which has bumped up the yields, which continue to climb up.
When there is a high inflationary period, it is understood that central banks sooner or later have to start pushing up interest rates to curb money supply in the economy, which eventually puts a leash on inflation. Consequently, when interest rates are expected to go up, investors try to make an exit from current (low interest rate) bonds in order to switch to newer (higher interest rate) bonds. This massive selling, which often outstrips demand for these current bonds, results in falling prices that end up spiking the yields.
Market participants are further expecting the tightening of monetary supply as the RBA’s recent statement showed that underlying inflation could touch 4.75% mark by December 2022. This is significantly higher compared to the previous forecast of 2.75% which has gotten to investors.
Bottom Line
Looking at the global trend, central banks seem to be ready to cool down heated economies and the RBA is no different. Based on a few surveys, the cash rate is expected to climb up to 1.75% by the year end and 2.5% by the end of next year, which is probably being taken in consideration by debt market participants.
Read More: Further tightening expected as RBA shares fresh economic outlook
