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Interest Rates

While the Federal Reserve is still planning two rate hikes for the rest of 2016, it kept US interest rates unchanged in last week’s June meeting as Janet Yellen announced that the Fed is “quite uncertain about where rates are heading in the longer term”. Following this, the Fed also lowered its economic growth forecast acknowledging the uncertainty of Brexit will have consequences for global financial markets. Although the Fed chair has said described a July hike as “not impossible”, the consensus is now focused on September as the more likely option as recent US economic data has become conflicted again (weak May employment).

 

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 1.995% as at 16 June 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 1.51%. On the 17th June 2016 the ASX 30 Day Interbank Cash Rate Futures June 2016 contract was trading at 98.29 indicating a 19% expectation of an interest rate decrease to 1.50% at the next RBA Board meeting (no change from last week).