Sectors: Bonds

Theres an important wild card looming in the US with a new Fed Chair due in 2026 and President Trump is keen to get a similarly aligned person to himself onboard – at this stage he said that Kevin Hassett and Kevin Warsh are his top choices to lead the US Fed and that he expects the next chair of the central bank to consult with him on interest rates. An interesting scenario as the Fed is supposed to be independent of the Whitehouse.

The Australian bond market has fallen (rates higher) as would be expected when interest rate hikes are suddenly being priced in. However, with the 3s now trading well above the RBA cash rate we feel they’re around the correct level, pending future data, which should help the local growth stocks find a low.

Global bond yields had risen to 16-year highs ahead of this mornings Fed policy meeting, signalling concerns that interest-rate cutting cycles from the US to Australia may be ending soon. Yields on a Bloomberg gauge of long-dated government bonds have returned to 2009 levels.

The RBA closed out 2025—a year in which it cut rates three times—with a widely expected unanimous decision to hold at 3.6%, though the pause was accompanied by unexpectedly hawkish commentary.

The Australian bond is falling (rates higher) as would be expected when rate hikes are suddenly being priced in after further cuts were expected since the last cut in August – a 180 reversal of sentiment. The 3s are now trading 0.4% above the RBA cash rate which feels about right to us while we wait on future economic data.

Last week, Chancellor of the Exchequer Rachel Reeves unveiled £26 billion ($34 billion) in tax increases in a budget designed to satisfy both bond markets and restive Labour backbenchers. Early market and political reactions suggested she struck the balance: UK gilt yields fell, while left-wing MPs praised the budget’s shift in the tax burden.

The Australian bond market is likely to sit in limbo until we see future inflation reads which recently have been too hot for the RBA, making credit markets start to consider rate hikes through 2026. Michele Bullock & Co. at the RBA have played this well, had they bowed to pressure  to cut rates further this year they would be facing some tough decisions today, at least they now have some breathing space to asses future data.

In the US, sales on Black Friday rose from a year earlier, according to a key data provider a sign that consumers are continuing to spend despite persistent economic concerns. Retail sales, excluding autos, increased 4.1% on the day after Thanksgiving, surpassing last year’s 3.4% growth. The figures, which are not adjusted for inflation, draw from both online and in-person purchases to give a broad view of economic activity.

The expected policy path of central banks, especially the RBA and the Fed, has been the main driver of the ASX’s relative performance in recent weeks. The chart below of US and Australian short-dated bond yields illustrates the divergence that weighed on local risk assets –  Australian 3-year bond yields increased ~0.5% from their recent lows while the US 2s edged down towards fresh multi-year lows.