Australian Bond Exchange Weekly Update
10th January 2025
Key points
- Weak inflation ignites hopes of early rate cuts
- Treasury yields surge
- Gold to continue rallying in 2025?
Global Cash Rates & Inflation
- The Reserve Bank of Australia (RBA) Cash Rate now sits at 4.35%pa and the annual inflation rate in the year to November is 2.3%.
- The US cash rate (policy rate) is currently between 4.25%-4.50%pa and the annual inflation rate in the year to November is 2.7%.
- The Bank of England Bank Rate currently sits at 4.75%pa to fight an inflation rate of 2.6% in the year to November.
- The European Central Bank Cash Rate (deposit facility) is 3.0%pa, to fight an annual inflation rate of 2.2% in the year to November.
Weak Inflation Ignites Hopes of Early Rate Cuts
Despite the monthly CPI indicator—reflecting more volatile categories like automotive fuel and fresh produce—rising to 2.3% in November from 2.1% the previous month, underlying inflation, considered a more stable measure, eased to 3.2%, down from 3.5% in October. This places it just above the Reserve Bank of Australia’s target range of 2-3%.The softer data sharpens the likelihood of a potential February rate cut from the Reserve Bank of Australia, with short-term money market futures currently ascribing a circa 70% chance of a cut.
As the new calendar year begins, we remind investors that relying on cash or term deposits may yield diminishing returns, with banks expected to cut term deposit rates further.
Treasury Yields Surge
While equity markets remain in a consolidation phase, longer-term government bond yields have been on a sharp upward trajectory, reflecting a divergence in investor expectations over the trajectory of short-term vs long-term rates.
At the time of writing, the yield on the 10-year U.S. Treasury bond recently climbed to 4.7%pa, marking its highest level since last April, while UK 10-year Gilt Yields jumped to 4.82%pa, the highest level since August 2008. In Australia, the 10-year government bond yield sits at 4.53%pa.
This surge reflects growing investor expectations of prolonged higher interest rates and also affirm the ongoing shift in market sentiment, with bonds continuing to be seen as an attractive destination for risk-adjusted returns.
Gold to continue rallying in 2025?
State Street Global Advisors, one of the world’s largest investment managers, has projected that gold prices could reach as high as USD $3,100 per ounce this year.
This bullish outlook is underpinned by several factors, including continued geopolitical uncertainty and sustained demand from central banks.
The rally in gold prices also reflects its enduring appeal as a hedge against inflation and market volatility, with investors increasingly turning to the precious metal as a safe haven in the face of economic uncertainty.
While gold remains one of the most traditional and widely recognised tools for hedging against inflation and market volatility, fixed-income securities, such as inflation-linked bonds and floating-rate notes, also offer valuable portfolio protection.
Inflation-linked bonds adjust their payouts based on changes in the inflation rate, preserving purchasing power in rising price environments. Floating-rate notes, on the other hand, benefit from increasing interest rates by providing coupon payments that adjust upward with benchmark rates.
Together, these instruments can complement gold’s hedging qualities, offering investors a diversified approach to mitigating inflation risks and enhancing portfolio resilience in uncertain economic conditions.
*Data accurate as at 10.01.2025
Disclaimer: This document has been prepared by ABE Distribution Pty. Ltd ACN 673 177 912 Corporate Authorised Representative 1307088 (“ABE”) and is of a general nature only. It was prepared without considering your financial needs, circumstances and objectives. Before investing in a fixed-interest product with ABE, you should consider whether it is appropriate for your circumstances and review the relevant terms and conditions. This document contains links to other third-party websites, some of which require a subscription to read. Such links are for your convenience only, and ABE does not recommend or endorse these third-party sites.. No representation or warranty is made as to the accuracy, completeness or reliability of any estimates, opinions, conclusions, or other information contained in the content. The content may contain certain forward-looking statements. Forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties, and other factors, many of which are beyond our control. To the maximum extent permitted by law ABE disclaims all liability and responsibility for any direct or indirect loss or damage that you may suffer as a result of relying on anything in this content. Past performance is not an indication of future performance