Australia’s 10-year government bond yield slipped below 4.8%, approaching a four-month low, after a mixed inflation report did little to bolster expectations of further interest rate increases. Headline consumer prices declined 0.7% in May from the previous month, bringing annual inflation down to 4.0% from 4.2% and marking the slowest pace in three months. However, underlying price pressures remained resilient: trimmed mean inflation rose 0.4% on the month, beating forecasts and pushing the annual core rate up to 3.6%.
The conflicting inflation signals have left markets divided, with futures pricing in roughly a 50% probability of another rate hike, now seen as more likely later in the year than at the August meeting. At the same time, progress in ongoing US–Iran peace talks and increased shipping traffic through the Strait of Hormuz have helped ease inflation worries. A persistently hawkish outlook for US interest rates has also supported the relative performance of Australian bonds versus US Treasuries, putting additional downward pressure on the yield premium of Australian debt over its US counterparts.
