Australian bonds sold off as investors anticipate the nation’s central bank will raise interest rates on Tuesday for the first time since 2010.

Yields on benchmark 10-year government notes jumped 11 basis points to 3.24%, the highest since November 2014. The premium over similar-dated Treasuries rose to 30 basis points, up 12 basis points from Friday.

Bonds are tumbling worldwide this year as central banks move to aggressively tighten policy to counter elevated inflation. The Bloomberg Global Aggregate Total Return Index lost 5.5% in April, the biggest monthly drop since its inception in 1990. Investors are pricing in a half-point increase by the Federal Reserve on Wednesday, its steepest hike since 2000.

 “Australian bonds have under-performed to reflect the market’s confidence that the RBA will now deliver its first hike of the cycle this week,” said Andrew Ticehurst, a rates strategist in Sydney at Nomura Holdings Inc. “Stronger-than-expected U.S. wages data led markets to conclude that central banks will be forced to stay on the hawkish path, and will seek to get back to the relative safety of neutral policy settings, as quickly as they can.”

Treasury 10-year yields were little changed on Monday at 2.94%. They climbed about 11 basis points on Friday after the U.S. employment cost index surged by a record 1.4% in the first quarter. Swaps traders are pricing in four straight half-point hikes by the Fed to take its benchmark rate to 2.33% by the end of its September meeting.

Australian traders are also expecting aggressive moves from the RBA. Overnight-index swaps see the cash-rate target at 2.5% by year-end, from a record-low 0.1%, which would be the sharpest annual increase since 1994. That also implies at least two occasions when the central bank raises rates by more than a quarter point.

Source:
courtesy of BLOOMBERG

by Garfield Clinton Reynolds

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