The interest rate on Australian 10-year Government bonds has increased sharply and is up more than 50 basis points since late October. This move marked a break in Australian yields from their close tracking of US yields over the past two years. 

The increase in Australian yields has been larger than for other advanced economies, and has taken Australian 10-year yields higher than in peer economies. Notably, Australian yields have increased to be higher than in countries with large fiscal deficits and rising government debt, such as the US and UK. However, Australia’s inflation target at 2.5% is 0.5% higher than in most countries, explaining some part of higher long-term bond yields.

The increase in the Australian 10-year yield has not been driven by rising long-term inflation expectations despite it following the release of higher than expected inflation – both for the September quarter and then the month of October. Long-term inflation expectations have remained fairly stable.

Rather, the rise in the real long-term yield has been driven by the sharp turn in expectations for the path of the cash rate. When the RBA last cut the cash rate in mid August financial markets were expecting another one or two cuts this year. But stronger inflation data have flipped market pricing to no chance of further cuts, at least one rise by mid 2026 and two by the end of 2026.

The reversal in the expected path of monetary policy has been driven by domestic inflation. Expectations for the path of policy rates from peer central banks have only increased slightly since late October.

The increase in expectations for the path of the cash rate has unwound the inversion of the short-end of the curve that had persisted for much of the past few years. It has also seen a parallel shift in the long end of the yield curve, with yields from four years out all increasing by over 50 basis points.

The end of monetary policy easing could have further implications for interest rates. In the past, the end of cash rate cuts has seen the front end of the curve steepen over subsequent months, with the slope of the overnight-to-3-year part of the curve typically increasing by 50 basis points or more.

The recent move, while it was starting from an inverted curve, has been somewhat smaller to date. The slope of the 3-year to 10-year part of the curve is broadly in line with the equivalent point in past cycles. However, if markets begin to price a sharper tightening in policy, short-end of the curve could steepen further, consistent with past behaviour. This could push long rates higher, although they are already around their highest in 14 years.

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