Yield Curve Flattest & 3-Year Yield Highest Since 2011

The Australian 3/10 cash curve has reached its lowest level since 2011, as the 3-year yield climbs to its highest level since 2011. At 13bp, the curve is approximately 9bp flatter compared to Friday's closing level, while the 3-year yield has risen by 40bp.

• The flattening of the Australian curve and the upward movement in the 3-year yield coincide with multiple factors.
• Firstly, there was a global surge in bond yields overnight triggered by the unexpected rate hike from the BoC, which occurred just one day after a similar move by the RBA.
• Secondly, the flattening comes following yesterday’s hawkish speech by RBA Governor Lowe and disappointing Q1 GDP data, which revealed concerning updates on productivity and unit labour costs (ULC). Productivity slowed to -4.5% year-on-year, the lowest annual rate since the series began in 1979. Additionally, ULCs increased from 6.9% year-on-year in Q4 to 7.9%, marking the highest annual rate outside of the pandemic since 1990. These data points will contribute to inflation risks and are likely to raise concerns for the RBA.
• The RBA's surprising 25bp rate hike, bringing the cash rate to 4.10%, coupled with the Q1 GDP data, has led to heightened expectations for the terminal cash rate, which has reached a cycle high of 4.45%.

Figure 1: AU 3/10 Yield Curve (%) Vs. 3-Year ACGB Yield (%)

Source: Bloomberg / MNI - Market News