RBA: No strong reaction from Australian bond yields - Westpac

Leila O'Connell, Research Analyst at Westpac, notes that Australian bond yields didn’t react strongly to today’s statement, yields moving a basis point or two higher, with the decision fully discounted by the market.

Key Quotes

“From a rates market perspective, we were most interested in the RBA’s commentary around mortgage rates, given Westpac’s 14bp increase variable mortgage rates on Wednesday last week.”

“The increase, effective 19 Sep, pushed market pricing for a RBA rate hike by this time next year from a 28% chance to a 16% chance. We have since seen 3yr futures test the 98.05 level, while the 10yr contract traded highs not seen since November last year.”

“In September, and following Westpac’s 14bp hike, there was no change to the RBA’s commentary around mortgage rates. As it did in August, the September statement included: “Some lenders have increased mortgage rates by small amounts, although the average mortgage rate paid is lower than a year ago.” This leaves the question open as to whether the RBA will adjust their rhetoric if the other major banks follow Westpac’s move.”

“Ultimately, we don’t see anything in the statement to discourage performance of AU rates products.”

“The potential for the Fed to re-emphasise its current median profile at the upcoming FOMC, implying a more hawkish outlook than is currently factored into the US front end, combined with a higher probability that the market will factor in a more dovish RBA profile, are the keys to expecting further AU-US 10yr spread narrowing, so the medium term -40bp target is still intact.”