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Interest Rate Commentary

The RBA cash rate remained unchanged in last Tuesday’s August board meeting at 1.50% but as expected. As a result, markets were broadly stable and it is likely a rate hike by the Fed will be needed to the depreciate the resilient Australian dollar rather than further rate cuts by the RBA.

 

In more interesting news, the 10-Year Australian government bond yield rose to 2.11% early trading this morning (from 1.96% at Friday close), the highest level since Brexit in July. This yield break-out was a function of a global bond market sell off last week which finished with US 10-Year rate breaking its recent range on Friday. The rise was driven by unanticipated announcement from the European Central Bank (ECB) that it will not add to bond purchase targets which challenged market demand expectations. Given the fragile global economy, investors should be weary of yield sensitivity to central bank announcements and the subsequent volatility that follows.

 

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 then 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 9th of September 2016 the ASX 30 Day Interbank Cash Rate Futures October 2016 contract was trading at 98.515 indicating a 7% expectation of an interest rate decrease to 1.25% at the next RBA Board meeting (up 2% from last week).