US 2-year yield rises above Australia for first time since 2000 - BBH

The steady increase in the US two-year yield while the market unwinds rate hike expectations in Australia has pushed the US rate above Australia for the first time since late 2000, points out the research team at BBH.  

Key Quotes

“In the past month, the US two-year yield has risen by 15 bp, while Australia's has fallen by 13 bp.  But the narrowing of the spread, and now inversion, has been unfolding for the past six years.”    

“Moreover, we suspect there is room for divergence to extend well into 2018.    Australia's case rate stands at 1.5%.   With the central bank likely on hold for an extended period, the two-year yield can slip closer to the cash target rate.  At the same time, the US two-year yield is trading 50 bp above the upper end of the current Fed funds target and 25 bp above the range expected to be adopted next month.  That 25 bp may be a reflection of the one rate hike that the Fed funds futures strip appears to have discounted in full.”

“What is not priced in is the likelihood of at least two rate hikes next year.  We suspect the US two-year yield can rise toward 2.0% and the two-year Australian yield can ease toward 1.50%.  The spread, which has just turned in the US favor is likely to continue and could trend toward 50 bp in a coming couple of quarters.”