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Yields spike, Australian dollar crunched as US Fed chair reinforces his ‘hawkish’ stance

Fanning global growth headwinds and risks for Aussie homeowners, benchmark US 10-year bond yields spiked to a seven year high last night following “hawkish” comments from US Federal Reserve chairman Jerome Powell.

Global leading US10-year bond yields leapt 12 points to 3.18 per cent last night and Australian 10-years jumped 6.5 points to 2.704 per cent after Mr Powell indicated the Fed could raise interest rates above the “neutral” level if the US economy continued to expand as expected.

“We may go past neutral, but we’re a long way from neutral at this point, probably,” he said.

Bond futures positioning is at record levels with bets for yields to break-out higher, but his comments following solid survey data was all the excuse bond bears needed to drive a fresh wave of selling.

US Federal Reserve Chairman Jerome Powell.US Federal Reserve Chairman Jerome Powell.
Camera IconUS Federal Reserve Chairman Jerome Powell.Picture: AP

The Australian dollar tumbled on the comments as the spike in US 10-years drove the spread over Aussie yields at the highest level in nearly 40 years.

“Solid data releases, higher oil prices and a technical backdrop that suggests there are not a lot obstacles for yields to continue to push higher will have many wondering how far this new push higher can go,” National Australia Bank currency strategist Rodrigo Catril said.

But Deutsche Bank strategists have noted that every Fed rate-rise cycle over the past four decades has ended in crisis somewhere in the world, with the global financial crisis 10-years ago the most recent one.

The rise in global borrowing costs will put further pressure on the major banks’ offshore borrowing costs, with the lenders eventually likely to pass them onto homeowners as they did last month.

The Australian dollar fell US0.9¢ to US70.90¢ as the negative yield differential to US rates undermined its allure.

But the falling dollar compounded the pressure on rising energy costs as oil prices remain at four-year highs.

Pimco analysts warned that falling house prices over the past 15 months and rising debt-servicing costs were lowering discretionary income and generating negative wealth effects which may constrain household consumption.

They expect a “benign” environment for Aussie yields, but expect the banks to be “negatively affected, given their large exposures to the housing sector directly and indirectly”.

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