Sectors: Bonds
U.S. 2-year yields fell to their lowest since 2022 as weak jobs data reinforced bets on Fed rate cuts. Friday’s report showed just 22,000 jobs added in August and unemployment rising to 4.3%, with downward revisions revealing June payrolls turned negative for the first time since late 2020.
Australian bonds have been fairly quiet since April, with a slight downside bias. Over the last few months, the 3s have hovered below 3.5%, but there are no signs of a move down towards 3%.
The US Treasury market stayed relatively calm this week despite Donald Trump’s mounting further attacks on the Fed. The US president continues to urge Fed policymakers to lower borrowing costs, fuelling concern that doing so prematurely will send prices higher.
Last week, Fed member Mary Daly suggested policymakers will be ready to lower interest rates soon, adding that inflation stemming from tariffs will likely prove temporary: “It will soon be time to recalibrate policy to better match our economy,” she wrote Friday in a brief social media post.
The comments from Jerome Powell on Friday night were supportive of Australian bonds, ticking yields down towards their 2025 lows. Markets are pricing in one more easing before Christmas and another in 2026 taking yields down towards 3%, nothing unrealistic here in our opinion.
Last week, UK inflation climbed to an 18-month high due to surging food, transport, and hospitality prices, putting the Bank of England (BOE) under pressure to reconsider the pace of interest-rate cuts.
On Tuesday last week, the RBA cut interest rates by 0.25% taking the cash rate to 3.6%, and the market is now pricing in another 0.60% of cuts in the next 12 months i.e. 2-3 further reductions.
The BOE cut rates as expected, albeit just, last week with the RBA set to follow suit tomorrow. Markets expect the Fed to ease in September/October. Unless Michele Bullock is particularly hawkish tomorrow credit markets will remain positioned for another two rate cuts into early 2026.
Following the split call on this month’s rate cut, we feel it’s improbable the BOE will want to move again until they get further clarity around the UK’s economy. Our preferred scenario is that the 2s will ultimately test the 3% area, which implies further rate cuts and a soft UK economy.
