Australian 10-year yield slips below U.S. for first time in over a year

What moved markets

Australia's benchmark 10-year yield dipped under its U.S. equivalent in early Sydney trade, with the gap at negative 2 basis points. If that persists through the session, it would be the first negative finish since August 2025.

The move followed a sharp rise in U.S. borrowing costs, with the Treasury 10-year yield jumping 14 basis points on Thursday. Commonwealth Bank of Australia said the recent swings in the spread could cool near term because Australia's curve looks rich, which may keep some buyers on the sidelines.

Why the spread flipped

The spread has compressed as investors price in an RBA that is close to finishing its rate increases and could start trimming rates late next year, with a softer labor market, a deeper housing slump, and weak sentiment weighing on growth. Concurrently, traders are wagering more heavily that the Federal Reserve will raise rates next month and keep tightening into 2027, reflecting a resilient U.S. economy and persistent inflation.

The negative gap may linger. In Melbourne, FIIG Securities' head of research, Philip Brown, said, "The Aussie markets assume the RBA will break the economy relatively soon and be cutting in late 2027."

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What the numbers mean for bond demand

Demand has been building in Australian bonds since midyear as slowing-growth signals reinforced the view that the RBA's rapid tightening is nearing its peak. The country's AAA rating and a stronger budget backdrop have also helped cap longer-dated yields.

Performance helps explain the interest. Hedged back to U.S. dollars, a broad measure of Australian government bonds is up about 2% this year, outpacing no gain in global debt and a 1.5% drop in Treasuries. Looking ahead, Commonwealth Bank strategist Michael Tang said, "Through next year could see spread more like negative 10 basis points to negative 15 basis points with RBA most likely done, and Fed delivering hikes."

The bottom line for portfolios

This is the classic policy-divergence trade: an RBA that markets think is near the finish line versus a Fed that investors expect to keep tightening into 2027. If that gap widens as CBA suggests, the relative case for AUD duration strengthens on a hedged basis, while U.S. duration faces a higher-for-longer backdrop.

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