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Wednesday 06 December 2023 by Philip Brown General

The RBA, the interest rate cycle and duration

Peaks in the cash rate create stable bond yields, but the rally starts well before the RBA cuts rates.

  • The RBA has indicated that there might be one more rate rise, or not. Either way, the end of the cycle is drawing near.
  • For longer term bonds, the top of the rate cycle and the last rate hike or two don’t matter overly much.
  • Instead, it is important to be long duration well before the rate cutting cycle starts – which is to say, start accumulating duration now.

This week the RBA twice indicated that although they don’t plan to raise rates again, it wouldn’t take too much of an upside surprise in the data to trigger a further rate rise. The most recent RBA statement said “whether further tightening … is required ... will depend on how the incoming data alter the economic outlook”. The RBA Governor gave a speech on recently highlighting the risk that inflation was becoming “home-grown and demand driven”. The RBA can’t do much about international oil prices, but home-grown demand is very much what the RBA can influence. So it’s hard to be definitive on whether or not there will be another rise or not.

However, for longer-term bond markets, whether or not the RBA raises rates again or not is surprisingly unimportant.

Another rate rise would affect short-dated yields and FRNs of course, but the longer bonds are not trying to capture whether the RBA peak is 4.35% or 4.60%. Longer-term bonds are capturing the next part of the cycle.

The below chart shows the 10Y bond yield and the RBA cash rate over the last three RBA rate hike cycles. It has been centred so that Day 0 is the day of the last RBA rate hike in that particular cycle. Notice that in both the August 2000 peak and the March 2008 peak, there was around nine months of stability in the 10Y yield and this spreads out over the period before and after the last rate hike. In 2010 there was a small sell-off (yields rising) leading into the last rate hike (the light grey line), but the 10Y yield was incredibly stable for six months after the last RBA move.

The historical evidence is clear – the bond yields are relatively stable over the last part of the rate hike cycle.


However, somewhere between 100 to 200 days after the last rate hike, the bond yields start to fall. But this isn’t really linked to the end of the rate hike cycle – it’s to do with the coming rate cutting cycle.

The next chart shows a similar analysis, but with the data centred of the first rate cut of the cycle. It’s very clear that if you wait until the RBA is cutting rates, you will have already missed a large amount of the fall in yields. Instead, bonds start to rally well before the RBA rate cut cycle begins.


So if long term bonds yields aren’t going to move terribly much in response to one more rate hike, but will start dropping well in advance of the first rate cut, the best way to position is becoming clear.

For most portfolios, a considered lengthening of duration at this point would allow the portfolio to prepare for the end of the RBA rate hike cycle and position for the next part of the cycle. There’s not too much to fear from rising government bond yields driven by the RBA. The bond yields are unlikely to rise materially even if the RBA raised rates again – but those yields are likely to start falling at some point either in 2024 or 2025.

It might seem early to position for a bond price rally starting in 2025, but the Australian bond curve is largely flat – you still get strong yield from investing in a longer bond. This allows investors to collect high yields during the (hopefully) stable peak in the RBA rate, before being well positioned to capture capital gains whenever the fall in yields begins.