Australian three-year bond yield rises to highest level in 10 years on rate hike bets

The news: Australian government bond yields climbed overnight, with the three-year yield rising to 4.57%, its highest in more than 10 years, and the 10-year yield reaching 4.97%, the highest level in four weeks.

The context: This follows Australian Bureau of Statistics data released on Thursday showing household consumption rose 0.3% month-on-month in January, alongside a stronger-than-expected economic growth in the fourth quarter.

Markets now see a 30% chance of a rate hike this month and are fully pricing in a move by May, amid a tight labour market and persistent inflation.

Investors are also monitoring the potential impact of escalating conflict in the Middle East on growth and inflation. RBA governor Michele Bullock recently said the Reserve Bank of Australia remains “very alert” to risks and is prepared to tighten policy further if deemed necessary.