After three interest rate cuts, the market is discussing the possibility of the Reserve Bank of Australia restarting interest rate hikes! The 10-year Australian government bond yield has reached a new high in a year.

As the market increasingly speculates that the Reserve Bank of Australia (RBA) will return to raising interest rates to curb inflation, Australian government bond yields have risen to their highest levels this year. The yield on the Australian 10-year government bond, which serves as a pricing benchmark for risk-free returns, has risen significantly for five consecutive trading days, reaching a peak of 4.70% during Friday's trading session, the highest level since November 2024. The yield on the 3-year Australian government bond also briefly rose 6 basis points to 4.04%, reaching its highest point this year. A statistical data released on Thursday showed that Australian household spending in October exceeded economists' expectations, while economic data released the day before indicated an unexpected expansion in wage growth metrics, implying that inflationary pressures continue to rise. These data have strengthened the case for the RBA to resume raising interest rates next year. Overnight index swaps indicate that the Reserve Bank of Australia is expected to raise its official cash rate by 25 basis points by the end of 2026. Just a month ago, these contracts indicated a probability of over 50% of further interest rate cuts within the year. The market's bets on the RBA raising interest rates have pushed up Australian bond yields. "The market view that the next move by the Reserve Bank of Australia will be a rate hike rather than a cut is gaining traction among traders," said Frances Cheung, Head of FX and Rates Strategy at OCBC Bank in Singapore. The latest economic data this week suggest that the RBA may swiftly change its policy stance and shift towards a hawkish pause in rate cuts or even rate hikes, as other central banks, particularly the Reserve Bank of New Zealand and the European Central Bank, may have ended their easing cycles and are beginning to discuss when to raise rates. Thursday's data also showed that promotional activities, large concerts, and cultural festivals significantly boosted consumer spending, driving strong demand for dining and hotel accommodations in major cities across Australia. These data add to other recent indicators of Australia's economic resilience: house prices continued to rise in November, business investment in the three months to September exceeded market expectations, and overall household consumption showed strong resilience. Additionally, as shown in the graph above, Australian bond yields have risen along with financial market inflation expectations, highlighting inflation as a key theme in bond markets. "The fundamental issue is that, on one hand, Australia's Gross Domestic Product (GDP) shows growth in household consumption; on the other hand, there are signs of significant growth in investment in the field of artificial intelligence," said Philip Brown, Head of Research at FIIG Securities in Melbourne, "However, the economy does not have enough spare capacity to accommodate this investment surge, and the possibility of the return of the inflation devil is high." The increasing inflationary momentum is exacerbating concerns about inflation in Australia, indicating that the central bank may take a more hawkish stance at its final monetary policy meeting of the year on December 9. Although the market expects the RBA to keep the cash rate unchanged, RBA Governor Michele Bullock stated on Wednesday that policymakers are closely monitoring inflation pressures and are prepared to act decisively when signs of a resurgence in inflation emerge. The Reserve Bank of Australia has cut interest rates three times this year, lowering the benchmark rate to 3.6%, hovering around its lowest level since April 2023. Following third-quarter inflation breaking through the upper limit of its 2% to 3% target range and the labor market in the country remaining tight with a positive number of job vacancies, the RBA's policymakers have also adopted a data-dependent stance in recent public speeches. "The risk pricing is further inclined towards a rate hike decision in the first half of next year," said Ken Crompton, Head of Rate Strategy at National Australia Bank. "In my view, the market has almost priced in this expected outcome into our financial product portfolios, so there may be limited room for further increases in yields," he said, emphasizing that yields across all tenors are likely to remain near the current high levels.