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Monday, 18 October 2021

Yields creeping higher

Inflation stirs

Faster inflation in New Zealand has led to earlier than expected rate hikes over the other side of the Tasman.

Over in Europe, meanwhile, the Bank of England is also guiding markets towards potential rate hikes over the year ahead.

And yields in the US are recovering towards the levels we were seeing before COVID-19 struck. 

In Australia the 3-year bond yield is now up and away like a meme stock, having been stuck at rock bottom levels until relatively recently. 

Around the world there have been signs of inflation stirring, and there's certainly been a surge in commodity prices, such as seen recently in thermal coal, oil, and gas. 

Reports of slower growth in China hasn't stopped Brent oil approaching $86/barrel - set to breach its 2018 price level - and over the past two months thermal coal prices have exploded off the charts, while there is also an awkward global gas shortage.  

Perhaps the biggest question facing markets over the next year or two is whether inflation is transitory, or if it proves to be more persistent. 

Despite the Reserve Bank of Australia's repeated insistence that rate hikes are off the table until 2024 at the earliest, financial markets are now pricing for an upwards move within the next 12 months. 

It's been over a decade since we last saw a hike in Australia, so it will be quite a novelty when that day does come!