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Interest Rate Commentary

The 10-Year Australian government bond yield rose to ~2.16% early trading this morning (from ~2.09% at Friday’s close), the highest level since Brexit in July. As a result the Australian yield curve continues to steepen as yields for shorter dated bonds rise less than longer dated bonds.

US yields rose on Friday night following stronger than expected US CPI data, rising to 1.1% year-on-year in August. As a result the futures market increased the probability of a December rate hike increased from ~47.5% to ~51.2%. The Bank of Japan (BoJ) also meets this week and are due to announce their decision on Wednesday with the release of the result of a review of current monetary policy settings.

Domestically the Reserve Bank of Australia (RBA) are due to release the minutes from September’s meeting on Tuesday.

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 15th of September 2016 the ASX 30 Day Interbank Cash Rate Futures October 2016 contract was trading at 98.51 indicating a 5% expectation of an interest rate decrease to 1.25% at the next RBA Board meeting (no change from last week).