Bond traders up bets on more rate rises around the world including from the Reserve Bank of Australia
Meanwhile, US Treasury bond yields climbed to a two-and-a-half month peak after data on Thursday showed a persistently tight labor market and more robust economic growth, a warning sign that the Federal Reserve might not be finished raising interest rates.
“Central banks have been saying to everyone, ‘We’re not going to ease anytime soon’, but the market didn’t reflect that,” said Warren Hogan, Judo Bank’s chief economic advisor. “Markets have been mispriced since the Silicon Valley Bank [collapse] and this is a correction.”
US Labour Department data showed initial claims for state unemployment benefits increased by 4000 claims to 229,000 last week, while the previous week’s data was revised sharply lower, suggesting the jobs market was still healthy.
US gross domestic product also increased at a 1.3 per cent annualised rate last quarter, the government said in its second estimate of first-quarter GDP growth. That was revised up from the 1.1 per cent pace reported last month, catching economists by surprise.
The US Treasury two-year yield, which is sensitive to interest rate expectations, jumped to 4.54 per cent and has surged 29 basis points since Monday. The 10-year return jumped 14 basis points on the week to 3.82 per cent.
Federal funds futures now imply a 49 per cent probability that the Fed will raise rates at the end of a two-day policy meeting on June 14, a sharp increase from 36 per cent on Wednesday. They are fully priced for a 0.25 of a percentage point lift to a range of 5.25 per cent to 5.5 per cent by July.
The US price action dragged Australian bond yields to their highest level since March 7. The three-year bond yield and the 10-year government rate were both up 13 basis points to 3.49 per cent and 3.76 per cent, respectively.
Interbank futures now imply a 75 per cent chance that the Reserve Bank of Australia will increase the cash rate to 4.1 per cent by August, up from 50 per cent earlier in the week.
Traders up RBA bets
Jack Chambers, rates strategist at ANZ, said investors had scaled up expectations of higher borrowing costs after the mood turned more positive about the US debt ceiling negotiations.
Worries about a potential default have supported the US dollar and weighed heavily on the Australian dollar as talks continue over the $US31.4 trillion ($48.2 trillion) debt ceiling. Treasury has warned it will be unable to pay all its bills on June 1 if the limit is not increased.
The Australian dollar sank to its lowest level since November to about US65¢. It has shaved off 4.6 per cent this year. A weaker local currency will be unwelcome by the RBA as it typically adds to inflationary pressures by making imports more expensive.
Mr Hogan forecasts two more interest rate increases, taking the cash rate to a peak of 4.35 per cent.
“The market and economists are completely underestimating the significance of the improvement in the [Australian] housing market in the last two months. It shows clearly that Australian interest rates are not restrictive,” he said.