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Interest Rate Commentary

Interest rate markets across the globe remain very sensitive to data releases. We continue to believe that the shape of our yield curve will be subject to what is happening with US monetary policy. However, it is getting more difficult by the day to see light at the end of the tunnel for domestic policy and where the end of this easing interest rate cycle might be. Inflation remains weak and in country, where economic growth remains subject to a lower currency (or higher commodity prices), we feel the Reserve Bank is being forced into policy changes which are not necessarily in the best interest of all consumers (driving house price inflation).

 

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 5th of August 2016 the ASX 30 Day Interbank Cash Rate Futures June 2016 contract was trading at 98.52 indicating a 10% expectation of an interest rate decrease to 1.25% at the next RBA Board meeting.