What drives bond yields – Part 5: US fiscal trends
Michael Anthonisz, QTC Chief Economist
Published: 8 November 2024
5 min read
The US Government’s fiscal position has slowly but consistently weakened over an extended period. If left unaddressed this could at some point lead to some disruption in global financial markets. This note examines trends in and the outlook for US public finances as well as what the potential impact of these might be on US Treasury bond yields.
This note, the fifth in a series on the drivers of bond yields, provides a topical example of a factor – US fiscal trends – which could impact the risk (or ‘term’) premium, a key sub-component of bond yields. It builds on earlier notes in this series. The first outlined the different sub-components of yields including expectations and risk premiums for short‑term real interest rates and inflation. The second presented estimates and a discussion of trends in these while the third note identified drivers of the sub-components. The fourth note presented a deep dive into a factor (equilibrium interest rates) which could impact the other component of bond yields, expected short-term interest rates. The next note, the final in the series, will present long‑term projections for US and Australian Government bond yields.
What drives bond yields – Part 4: Natural rates vs neutral rates
Michael Anthonisz, QTC Chief Economist
Published: 16 October 2024
5 min read
This note, the fourth in a series, provides a topical example of a factor – equilibrium interest rates – which could impact expectations of short-term real interest rates, a key sub-component of bond yields. It builds on the concepts outlined in the first note of the series, the estimates and trends covered in the second note, and the drivers of the sub-components of yields identified in the third note. Future instalments in the series will include a deep dive into a topical factor that could influence another key building block of yields – the risk (or ‘term’) premium – as well as present long-term projections for bond yields.
What drives bond yields – Part 3: Catalysts
Michael Anthonisz, QTC Chief Economist
Published: 19 September 2024
5 min read
This note, the third in a series, attempts to identify what drives the different sub-components of bond yields. It builds on the concepts outlined in the first note of the series as well as the estimates and trends covered in the second note. Future instalments in the series will include deep dives into topical factors which could influence these sub-components and present long-term projections for bond yields.
As a reminder, there are four sub-components of bond yields. These are related to investor expectations for real interest rates and inflation as well as premiums charged by investors to account for the risk that actual real interest rates and inflation might differ from these expectations if they buy a longer-term bond rather than a series of shorter-term securities.
Estimates of these sub-components are useful in gauging which could be driving changes in bond yields over time. However, it is not necessarily clear what the precise catalysts for moves in these sub-components might be. Identifying these in the context of US Treasury 10-year bond yields is the purpose of this note.
What drives bond yields – Part 2: Trends
Michael Anthonisz, QTC Chief Economist
Published: 26 August 2024
5 min read
This note, the second in a series, examines trends in the sub-components which make up bond yields. It builds on the concepts set out in the first note which focussed on trends at the component level. Future instalments in the series will attempt to identify what could be behind movements in these sub-components, provide deep dives into topical factors which could influence these and present long-term‑ projections for bond yields.
What drives bond yields – Part 1: Overview
Michael Anthonisz, QTC Chief Economist
Published: 8 August 2024
5 min read
This note provides an overview of what drives movements in bond yields. This introductory piece is the first in a series with future notes to explore the components of yields in more detail, provide deep dives into topical factors which could influence these and present long-term projections for bond yields.
4 questions for ’24
Michael Anthonisz, QTC Chief Economist
Published: 11 January 2023
5 min read
Last year saw inflation moderate and economic conditions remain resilient. Hopes for a ‘soft landing’ are high, yet so too is uncertainty around the outlook for the economy.
Given a lack of clarity around the outlook, in this piece, I try to shed some light on four of the key questions for 2024.
- What has driven the Australian economy’s rebalancing and what could in 2024?
- What would it take for inflation to get back to the middle of the RBA’s inflation target band by the end of 2025?
- What is the likelihood of a US recession this year?
- What are the main economic and market risks (upside and downside) for 2024?
What goes up must come down – When, why and by how much will interest rates be cut
Trent Saunders, QTC Principal Economist and Michael Anthonisz, QTC Chief Economist
Published: 6 October 2023
5 min read
The Reserve Bank of Australia (RBA) has raised its cash rate rapidly since early last year to curb inflation and anchor expectations. But this phase may be nearing its end. In this article, QTC economists Trent Saunders and Michael Anthonisz have taken a closer look at where the cash rate might go from here, drawing on historical experience and some of the unique challenges facing the economy. They find that while there are good reasons to believe the cash rate is close to its peak, this does not mean that the RBA will cut rates anytime soon.
From boom to swoon – What the next phase of Australia’s economic cycle might look like
Michael Anthonisz, QTC Chief Economist and Trent Saunders, QTC Principal Economist
Published: 19 July 2023
5 min read
The sharp rise in interest rates in Australia has increased risks to economic growth. In this article, QTC economists Michael Anthonisz and Trent Saunders consider what the next phase of the economic cycle might look like for Australia, including what the probability of a recession may be and what scenarios might lead to this sort of outcome.
RBA cash rate scenarios following its hawkish tilt
Trent Saunders, QTC Principal Economist
Published: 6 June 2023
5 min read
The Australian economy is facing difficult conditions and the outlook remains uncertain. In QTC’s latest Economic Research article, Principal Economist Trent Saunders looks at how economic conditions and the RBA’s cash rate could evolve over the next five years. He also shows how various risks considered by the RBA Board could alter the outlook for interest rates.
Passing the peak: Will the recent slowdown in inflation be sustained?
Trent Saunders, QTC Principal Economist
Published: 8 May 2023
5 min read
Inflation appears to have passed its peak, but how quickly will it fall from here? In QTC’s latest Economic Research article, Principal Economist, Trent Saunders looks at the different drivers of inflation to shed light on how persistent it could be and what this means for the outlook for interest rates.
Financial Conditions in Australia
Michael Anthonisz, QTC Chief Economist
Published: 30 March 2023
5 min read
Rate hikes from the RBA are raising the cost of capital in the Australian economy, but there are a broader range of factors which determine the degree to which developments in the financial sector influence the real economy beyond just changes in monetary policy. QTC’s Chief Economist Michael Anthonisz breaks these down in this note on financial conditions in Australia.
How tight is monetary policy in Australia?
Michael Anthonisz, QTC Chief Economist
Published: 13 February 2023
5 min read
With the RBA increasing interest rates by a record amount over the past year and with rates at the highest level in a decade, QTC’s Chief Economist Michael Anthonisz asks in this note ‘how tight is monetary policy in Australia’?
Three questions for ’23
Michael Anthonisz, QTC Chief Economist
Published: 9 December 2022
10 min read
The last few years have seen incredible volatility and uncertainty. This is yet to fully subside and key questions remain around the economic outlook. In this note, QTC’s Chief Economist Michael Anthonisz seeks to answer three of the biggest questions for 2023.
Where are we in the economic cycle?
Michael Anthonisz, QTC Chief Economist
Published: 22 November 2022
10 min read
Economic momentum is fading, a more pronounced slowdown seems inevitable, and a recession is very much possible. Yet households are still spending and labour markets are as tight as they’ve been in half a century. So where exactly are we in the economic cycle and where might we be headed? In this note, QTC’s Chief Economist Michael Anthonisz uses several approaches to gauge where we are in the global and domestic economic cycles. He finds that most indicators point to economies still being in the expansion stage, but equally, many suggest that this could soon change.
What’s up with Australian inflation?
Trent Saunders, QTC Principal Economist
Published: 28 September 2022
8 min read
Inflation has increased sharply in Australia over the past year, with prices growing at their fastest rate since 1991. This surge in inflation has been underpinned by several factors, including disruptions to global supply chains and a historically tight domestic labour market. However, the importance of these different drivers is not immediately clear. In this note, Trent Saunders takes a closer look at what has driven recent inflation outcomes in Australia. He finds that stronger demand may account for around half of the increase in prices in Australia over the past year.
How tight is the Australian labour market? And what does it mean for wages and inflation?
Trent Saunders, QTC Principal Economist
Published: 6 September 2022
6 min read
In this note, Trent investigates what measure of labour market slack is the best predictor of wages growth and inflation in Australia. I then assess what this means for the outlook over the coming year. I find that the job advertisements-to-unemployment ratio has historically provided the most accurate outlook, though other indicators provide similar insights. These indicators suggest that wages growth will pick up noticeably over the coming year.
What effect will higher interest rates have on the Australian economy?
Trent Saunders, QTC Principal Economist
Published: 1 August 2022
9 min read
The Reserve Bank of Australia is expected to increase the cash rate sharply over the coming year in response to the high outlook for inflation. In this article, QTC’s Principal Economist Trent Saunders looks at how cash rate changes have affected different parts of the economy in the past, as well as whether these responses might be different in the current cycle.
Assessing US recession risks
Michael Anthonisz, QTC Chief Economist
Published: 30 May 2022
5 min read
In this article, QTC Chief Economist estimates the probability of a future recession using the 2‑year/10-year yield curve as well as a range of alternate measures. He finds that the 2-year/10-year yield curve currently overstates the odds of a US recession over the next 12 months. Though, given the scale of the inflation challenge in the US and the relative lack of ‘soft landings’ in these contexts historically, it would not be surprising to see aggressive rate hikes from the Federal Reserve lead to a recession over a longer time horizon.
Oil prices and inflation: Is Australia facing a crude shock?
Trent Saunders, QTC Principal Economist
Published: 26 April 2022
4 min read
Crude oil prices have increased sharply in recent months for Australia, with the price of Brent crude oil peaking in March at its highest level since 2008. In this piece, QTC’s Principal Economist Trent Saunders assesses what higher crude oil prices could mean for inflation over the coming years and answers questions like, will higher crude oil costs flow through to other prices in the economy?
The demand-supply imbalance in the Australian economy
Michael Anthonisz, QTC Chief Economist
Published: 6 April 2022
9 min read
COVID-19 was one of the biggest health and economic emergencies of the last century. One of its legacies is how profoundly it has affected the demand for and supply of goods and services. In this piece, QTC’s Chief Economist Michael Anthonisz constructs estimates of demand and supply conditions in Australia. He examines how these have evolved over time and assesses what the implications for inflation might be of the imbalance between the demand and supply.
Part 2 of 2 – How high could the RBA take the cash rate? Estimates of the neutral and terminal rate in Australia
Trent Saunders, QTC Principal Economist
Published: 22 February 2022
9 min read
This is the second of a two-part series by QTC’s Principal Economist Trent Saunders, which explores the longer-term outlook for the cash rate. This follows Trent’s previous article ‘Part 1 of 2 – An RBA hiking cycle: Some paths less travelled’ that discussed the expected timing of the initial increase in the cash rate and the path it may take over the next couple of years.
Part 1 of 2 – An RBA hiking cycle: Some paths less travelled
Trent Saunders, QTC Principal Economist
Published: 28 January 2022
9 min read
This is the first of a two-part series exploring the outlook for the cash rate. The RBA is expected to raise rates in the next 12 months but hiking cycles have been rare in the post-GFC period. In this piece, QTC’s Principal Economist Trent Saunders explores the different paths that interest rates could follow through a part of the policy cycle we haven’t faced for some time. He finds that the economy may be strong enough to justify cash rate increases from the second half of this year and that the cash rate could rise by a couple of percentage points over the next few years.
Assessing the probability of different inflation outcomes
Michael Anthonisz, QTC Chief Economist
Published: 13 September 2021
9 min read
Where will inflation be in two years? The RBA forecasts have it back within the two-to-three per cent target band. However, in the current environment, it is far from certain that this will be achieved. QTC’s Chief Economist Michael Anthonisz seeks to quantify the uncertainty over the outlook for inflation by estimating the probability of a range of potential outcomes two years from now.
What to expect when you’re expecting inflation
Trent Saunders, QTC Principal Economist
Published: 28 June 2021
6 min read
The outlook for inflation is highly uncertain. While business inflation expectations have increased to their highest level since 2008, other measures have experienced more modest gains. In this article QTC’s Principal Economist Trent Saunders assesses the historical accuracy of various inflation expectations to gauge how much focus we should put on these different economic signals. The results suggest that inflation is likely to reach the bottom of the RBA’s target band in the second half of 2022 and will be slightly above two per cent by the middle of 2023.
Daily nowcasting of global and Australian GDP growth
Michael Anthonisz, QTC Chief Economist
Published: 26 May 2021
3 min read
Over a year has passed since Australia saw the worst of the COVID-19 pandemic recession, yet economic conditions are still evolving quickly. In this article QTC’s Chief Economist Michael Anthonisz uses ‘nowcasting’ methods to gauge how global and Australian economic output is changing in real-time. These nowcasts show that both global and Australian GDP growth remains firm so far in 2021.
Re-assessing Australia’s economic recovery
Trent Saunders, QTC Principal Economist
Published: 29 April 2021
6 min read
Australia’s economic recovery has been swift, with leading indicators suggesting that this rapid rate of improvement could continue in the coming months. In this article, QTC’s Principal Economist Trent Saunders uses three scenarios to project what this unexpected strength could mean for the economic outlook and the RBA’s cash rate decisions through to 2030.
What’s down with Australian inflation?
Trent Saunders, QTC Principal Economist
Published: 25 March 2021
5 min read
Inflation has remained stubbornly low in Australia over the past five years, with various cyclical headwinds and structural factors weighing against the stimulatory effects of historically low interest rates. These forces are likely to continue to weigh on inflation over the coming years, prolonging the time until we see an increase in the cash rate.
In this note, we take a closer look at what has underpinned low inflation outcomes to assess where we might need to see increases if inflation is to return to its target range. A key result is that low inflation over the past five years is largely explained by a weak labour market.
2030 Vision: Outlook for the economy and interest rates
Trent Saunders, QTC Principal Economist
Published: 18 February 2021
6 min read
In a world of uncertainty, it has proven difficult to see beyond short-term time horizons. In this article, QTC’s Principal Economist Trent Saunders explores Australia’s long-term path to economic recovery and alternate perspectives on how the economy and interest rates could evolve over the course of this decade. Using three scenarios and projections he takes a look at how the cash rate could move over the decade to 2030.