Interest Rate Commentary

Over the past week, the Australian government bond yield curve steepened significantly as uncertainty regarding US monetary policy continues to drive global interest rate volatility. Fixed rate bonds with a term greater than 5 years rose more rapidly in yield than shorter dated bonds as the generic Australian 10-year bond futures ended the week ~0.22% higher in yield at 2.14%. With the US Federal Reserve showing no clear signs of direction, volatility is expected to remain high.

However, overall yields across the curve remain low compared to long term averages. In November 2015, there was a progressive increase in the Australian 10-Year bond 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 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 7th of October 2016 the ASX 30 Day Interbank Cash Rate Futures November 2016 contract was trading at 98.540 indicating a 16% expectation of an interest rate decrease to 1.25% at the next RBA Board meeting (down from 25% last week). The tone of the RBA’s media release following last week’s interest rate decision to keep the cash rate at 1.50% remains intact.