Sectors: Bonds

Longer dated bond yields have rotated around current levels since late 2024 as traders weigh up sticky inflation against the occasional sign of a softening economy. It may be a touch early to “bet” longer dated yields will fall below 4%, especially with recent news out of France and Japan, but that is the direction we ultimately believe they will travel.

Activity has hotted up over the last 24 hours in credit markets with yields increasing in Japan and Europe following the political changes. However, bond investors have largely ridden a profitable playbook this year, enjoying wins on Federal Reserve interest-rate cuts and tumbling short-term US yields. 

Local yields climbed on Tuesday albeit slightly, after more hawkish remarks from Michelle Bullock, reinforcing doubts about the pace of future rate cuts. Another RBA move before Christmas is now viewed as a coin toss, with markets pricing in just one cut over the next 12 months, with the timing of which remains the key point of debate. The $A traded up more than +0.5%, confirming the market’s diminished confidence toward RBA rate cuts into and through 2026.

Australian bonds sold off on Wednesday, pushing yields higher after a hotter-than-expected monthly CPI print. The futures market has now priced out the chances of a cut when the RBA meet next week, while assigning less than a 70% chance of any easing by Christmas.

The Fed cut rates 0.25% as expected last week, although the commentary from Jerome was more hawkish than some hoped but the futures market is still looking for an additional four or five rate cuts into next Christmas.

The Japanese 2-year Government Bond (JGB) yield has surged toward 1%, after being deep in negative territory for many years. Last week at its two-day meeting, the BOJ kept the short-term policy rate unchanged at 0.5%, as expected.

In our opinion, the US 10s are one of the keys to whether equities can add to their impressive gains since April. While they remain firm (yield lower), things should remain on track. While the US 10s can remain around 4.0%, or ideally lower, they are unlikely to derail the bull market and can actually add a tailwind if they push down towards 3.60%.

The yield difference between the US 2s and 10s, or “Yield Curve,”  is widening at present. Markets are convinced that a number of rate cuts are looming in the coming year, while they are more cautious about the path for growth and inflation.

After weighing on stock market sentiment a few months ago long-dated bond yields are now offering support to equities that are currently viewing the economic backdrop through rose-coloured glasses.