The market’s prognosis on inflation in Australia is pretty grim, at least over the next 12 months.
Energy prices are rising from the Iran war, and living costs are crushing households who are bearing the brunt of higher interest rates. But beneath the headlines, an “interesting picture” is emerging, according to Westpac.
While government bond yields have surged to 15-year highs and traders are pricing in at least two more cash rate rises from the Reserve Bank of Australia this year, the market is also showing immense faith that the central bank will sort out the inflation problem.
The evidence is in the so-called long-term breakeven inflation rate, which is the difference between nominal bond yields – also known as conventional bonds – and inflation bond yields that are linked to consumer prices.
That breakeven rate has “moved largely sideways” since the outbreak of the Middle East conflict at the end of February, despite oil prices soaring more than 50 per cent in just four weeks.
Source: https://www.afr.com/markets/debt-markets/the-bond-market-offers-cheap-bets-the-rba-will-fail-on-inflation-20260323-p5rovq