Interest Rate Commentary

With the RBA identifying apartment oversupply as a key economic risk and the recent uptick in commodity prices supporting short term growth, markets are now pricing in little probability of a cut to the cash rate next month. All eyes remain on the US as global diverging monetary policy continues to shake financial markets. The Federal Reserve Chair, Janet Yellen, suggested the Fed would allow inflation to exceed 2% which pushed the US 10-Year bond yield to its highest point (1.803%) since June 2016.

As a result, the Australian government bond yield curve continues to steepen significantly due to a multitude of factors including US monetary policy, global bond demand, oil prices and the Australian government’s inaugural 30-Year bond. For more information, see our article “What’s happened to the 10-Year Government Bond Yield”.

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 14th of October 2016 the ASX 30 Day Interbank Cash Rate Futures November 2016 contract was trading at 98.535 indicating a 14% expectation of an interest rate decrease to 1.25% at the next RBA Board meeting (down from 16% last week).