Australia Government Bond 3Y

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Australian Bond Yields Surge to 15-Year High as Market Bets on 84% Chance of RBA Rate Hike

Australian government bonds came under heavy selling pressure, pushing the yield on 3-year bonds up 18 basis points to 5.03%, the highest level since May 2011, or a more than 15-year high. The 10-year yield rose 13 basis points to 5.38%. The selloff tracked a sharp decline in US Treasuries after tensions in the Middle East drove oil prices higher, and the US Treasury bought back fewer bonds than the market expected in the first operation of its expanded buyback program. Inflation pressures also led the market to increase bets that the Reserve Bank of Australia will raise interest rates this month, with Overnight-Indexed Swaps reflecting an 84% chance of a hike, up sharply from 65% on Thursday. Michael Tang, a rates strategist at Commonwealth Bank of Australia, said the market is heavily dominated by a hawkish monetary policy view, and that the factors that could halt the selloff are softer US CPI figures and clarity on Federal Reserve rate increases. Investors are now watching US inflation data due on Friday to assess whether the Fed will raise rates at next week's meeting.

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Australia's unemployment rate rises in July, pressuring rate hike outlook

The Australian Bureau of Statistics reported that the unemployment rate rose to 4.5% in July, higher than analysts' expectations for it to hold steady at 4.4%. Employment fell by 15,800 positions, against expectations for an increase of 12,000. Full-time employment rose by 16,300 positions, while part-time employment fell by 32,200. The labour force participation rate edged down to 66.9% from 67% in June, and the employment-to-population ratio fell 0.2 percentage points to 63.9%. The data support the Reserve Bank of Australia's view that the labour market will cool gradually, and led investors to scale back expectations for interest rate increases. After the release, the Australian dollar weakened 0.3% and the three-year government bond yield fell 0.04%, while investors lowered the probability of an RBA rate hike at the December meeting to around 60% from 68% previously. At its meeting on 11 August, the RBA board kept the policy rate unchanged at 4.35%, the second consecutive hold, saying higher unemployment and a weaker property market would cool economic activity enough to slow inflation.

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