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Interest Rate Commentary

While The Federal Reserve Chair, Janet Yellen, has not detailed the exact timing, there is growing consensus that the second rate hike of the current cycle could happen as soon as mid-June off the back of an improved labour market. As a result, employment data to be released this Friday will be a key factor in determining how soon the Fed continues to tighten monetary policy.

In Australia, the RBA defended its inflation target (2-3%) and reiterated that its framework will remain successful as disinflation remains prominent throughout most of the western world. Australia’s first quarter GDP report will be published on Wednesday and may give greater insight into the country’s uncertain position. However, inflation will continue to be the driver of any further monetary easing. Only time (and more data) will tell how soon further rate cuts will occur.

Between November and December 2015 there was a progressive increase in the 10-Year Australian Government Bond Yield from ~2.60% to a high of 2.99%. But since the 7th of December 2015 the flight to quality meant the 10-Year Yield gave back the changes in Q4 2015 and by the 16th of May 2016 the Yield dropped to a record low of 2.22%.

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% on 7 December 2015. It has since reached a low of 1.54%. On the 26th of May 2016 the ASX 30 Day Interbank Cash Rate Futures June 2016 contract was trading at 98.270 indicating a 10% expectation of an interest rate decrease to 1.50% at the next RBA Board meeting (down from 13% last week).