Fixed Interest

Fixed Interest Monthly Quarter 1 Year 3 Year 5 Year 10 Year
Bloomberg Ausbond Composite + Yr Index 0.29% -0.50% 2.87% 2.42% 4.08% 6.13%
Bloomberg Ausbond Bank Bill Index 0.13% 0.43% 1.75% 1.99% 2.30% 3.54%
Barclays Global Aggr TR Index (AUD Hgd) -0.23% -0.68% 2.06% 3.16% 4.64% 6.77%


Australian bonds returned 0.29% over February, with Australian government bonds returning 0.28% and longer-term government bonds (ten years plus) returning 0.17%. The Australian 10-year yield was flat over February at 2.81%, but jumped to a high of 2.94% early in the month. Globally, the Bloomberg Barclays Global Aggregate Bond Index (AUD hedged) returned -0.23% as global yields pushed higher. The five-year breakeven inflation rate—a market-derived gauge of expected inflation—reached its highest point in over five years, reflecting the market’s focus on wages and consumer prices. The US 10-year treasury yield underwent significant expansion, rising from 2.72% to 2.86%. The Japanese 10-year yield fell from 0.09% to 0.05%, still hovering above the Bank of Japan’s zero yield target. The German 10-year yield fell from 0.70% to 0.65%, while the 5-year yield fell from 0.10% to 0.02%, but still managing to hold above zero. 

The Outlook

The latest policy decision from the RBA on March 6 said nothing specific about the bank’s future plans, but analysts paid quite a bit of attention to the end of the sentence that read, “Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.” The “gradual” reference was taken to mean that the bank would need to leave interest rates where they are for even longer.

Although U.S. bond yields have drifted back down again in recent weeks, the likelihood is that the longer-term track for U.S. bond yields is upwards: The U.S. Federal Reserve is in the process of adjusting monetary policy back towards more normal levels, and other overseas central banks are likely to follow later on in the piece. Higher overseas bond yields are likely to feed through to higher local rates, probably much in line with the consensus forecast for U.S yields – up by around 0.3% this year and by a further 0.4% next year, which would take the 10-year Commonwealth bond yield to around 3.4% by late 2019.