FX.co ★ Australia 10Y Yield Moves Near 2011 Highs

Australia’s 10-year government bond yield traded around 5.2%, hovering near its highest level since mid-2011, as markets increasingly priced in further monetary tightening by the Reserve Bank of Australia amid persistent inflationary pressures. RBA Assistant Governor Sarah Hunter noted that policymakers have limited tolerance for inflation staying elevated and signaled that interest rates could be raised for a fourth time this year if price pressures prove stronger than expected.

Money markets now imply a 68% probability of a 25-basis-point increase to 4.60% at the September 29 meeting, up sharply from less than 10% a month earlier. The likelihood of rates reaching 4.85% next year has also risen, to about 60%. This hawkish repricing has widened the premium on Australia’s 10-year yield over US Treasuries to 43 basis points, the largest spread in three months.

At the same time, new survey data highlight mounting strains on the economy from higher borrowing costs, rising fuel prices and a softening housing market. NAB’s business conditions index fell in August to its lowest level in six years, while consumer sentiment deteriorated markedly in September.