Interest Rate Commentary

Interest rate markets were surprisingly dull last week. US Federal Reserve chairman Yellen spoke at Jackson Hole and the reaction was reasonably muted. Comments from other members varied but the message was that timing of the next move is not that important and the key reason why rates haven’t been lifted to date is low inflation. A September hike in the US remains possible (~42% probability based on US Interest Rate Futures) but December seems more likely (65% probability based on US Interest Rate Futures).


The domestic yield curve is flat and overall yields across the curve are low compared to long term averages. In November 2015 there was a progressive increase in yield from ~2.60% to a high of 2.99%. But since this time the flight to quality meant the 10-year yield gave back the changes in Q4 2015 and more recently the Australian Government 10-Year Bond Yield has continued to drop to record lows (new low of 1.819% as at 2 August 2016). The 3-year bond has followed a similar pattern and broke out of its yield range (1.90 – 2.10%) in November / December 2015 reaching a high of 2.18%. It has since collapsed to reach a low of 1.373% on the 2 August 2016. On the 26th of August 2016 the ASX 30 Day Interbank Cash Rate Futures September 2016 contract was trading at 98.51 indicating a 5% expectation of an interest rate decrease to 1.25% at the next RBA Board (down from 8% the week prior).