With markets waking up to no rate hikes Downunder and the Fed clearly building a head of steam with the US economy, the short end of the Australia/US yield spread has cratered to new lows today on its way to inversion:
Next month the US cash rate will reach 1.5%. Assuming we see moderate tax reform, another two hikes next year are in order. They’ll be priced well in advance so 2% at the US short end is plausible in H1 2018 even as Australia pulls back towards 1.75% or lower. That’ll invert the spread and it ought to keep falling:
Advertisement
The long end is lagging because of the US curve flattening:
