Australian three-year government bond yields have jumped to the highest level since late 2014, boosted by a lift in global government bond yields following the US Federal Reserve’s September FOMC meeting and mounting expectations that the Reserve Bank of Australia (RBA) will hike interest rates for the first time since late 2010 in the first half of next year.
Here’s the daily chart showing the sharp increase in three-year yields over the past three months.
“Yields pushed higher as the Fed gave the signal for a December rate hike and the long-awaited unwind of its balance sheet,” said ANZ’s economics team in note released today.
Along with the impact on global bond yields caused by the Fed’s announcement, ANZ says Australian yields have also risen as markets begin to bring forward the expected timing of a RBA rate hike.
Earlier this week ANZ shifted its view on the outlook for interest rates, forecasting that the RBA will begin to tighten policy in May 2018.
“We see the RBA tightening by 50 basis points in 2018,” the bank said. “This would reverse the rate cuts of 2016 and take the real cash back to zero.”
ANZ says the change to its view reflects “an outlook for growth that is a touch more positive and an easing to the downside risks”.
The spike in nearer-dated Australian bond yields, often influential on currency market movements, also explains why the Australian dollar has risen back above the US 80 cent level in recent days as traders begin to price in the likelihood of RBA rate hikes next year.
Markets are likely to get further clarification on that front with RBA governor Philip Lowe delivering a speech entitled “The Next Chapter” in Perth later today.
“It’s not too much of a stretch to conclude the content is most likely about the transition of the economy away from the mining boom and, possibly, what this might mean for policy,” says ANZ.
The speech is scheduled to begin at 3.10pm AEST, right around the time European markets will get into full swing.