Sectors: Bonds
Short-dated bonds were clobbered (yields higher) on Wednesday following the stronger-than-expected quarterly inflation print quashed hopes for a rate cut on Cup Day and probably well into 2026.
This month’s surprisingly soft employment data has cemented the hope of an RBA rate cut next week to a coin toss, with futures markets now pricing in a 90% chance of a cut before Christmas – it’s just a matter of when. The anticipated rate cuts by the Fed following last week’s soft CPI should help Michele Bullock’s comfort level to ease rates.
Traders are betting that the Fed will cut the rate by a total of 1.2% over the next 12 months. That would bring benchmark borrowing costs to 2.9%, below the 3% mark, largely considered a neutral level that neither stimulates nor restricts the economy.
Last week’s surprisingly soft employment data raised hopes of an RBA rate cut on Melbourne Cup Day, with the odds now sitting at 55% whereas a cut before Christmas is fully baked into the cake – the markets are asking the question of when, not if, Michele Bullock et al again cut rates this year.
The European Central Bank (ECB) appears to be at its conclusion after rates have been halved from 4% down to 2%. Futures are pricing in ~70% possibility of one more cut in the next 18 months.
The recent rally in Treasuries driven by concerns around US regional bank credit exposures, combined with a resurgence in trade tensions, eased on Friday as lender shares stabilised and comments on China by US President Donald Trump steadied the broader stock market.
Local shorter dated bond yields are set to retreat this morning following the volatility across offshore markets on Friday, although the weekend may have calmed some nerves.
US shorter dated bonds rallied on Friday as investors sought refuge in the safety of bonds, driving down yields in the process.
Volatility in Japan’s longer-dated government bonds is on the rise following Sanae Takaichi’s election win. Yields on Japan’s 40-year debt soared as much as 17 basis points on Monday as traders wagered that Takaichi’s pro-stimulus stance may prompt authorities to sell more government bonds.
