Australia’s 10-year government bond yield has climbed above 5.3%, its highest level since May 2011, mirroring a sharp rise in US Treasury yields as mounting tensions in the Middle East drive oil prices higher and intensify inflation concerns. The selloff in US government bonds deepened after the US Treasury bought back fewer securities than anticipated in its first expanded repurchase operation.
This move compounded the impact of surging oil prices, as escalating clashes between the US and Iran heightened fears of further disruptions to Gulf energy supplies. The resulting rise in inflation risks has strengthened expectations that central banks will need to keep monetary policy tighter for longer.
The oil shock has also increased speculation about additional monetary tightening in Australia. Markets are now pricing in an 84% probability that the Reserve Bank of Australia will deliver a quarter-point rate hike at its meeting later this month, which would be the fourth increase this year. Investors also expect the cash rate to peak at around 4.85% by early next year, the highest level since 2008. Attention now turns to the August employment data, which will be scrutinized for further signals on the RBA’s policy path.
