As we wrote in yesterday’s QB, bond markets in the US and Australia have performed well over recent weeks, reflecting better-than-expected inflation data, and the softening of tight labour markets.
US 10-Year Treasuries – last 30 days

Source: Trading Economics
Aust 10-Year Govt Bonds – last 30 days

Source: Trading Economics
The bond market rally is important for both property and equity markets. Bonds provide the benchmark for mortgage rates and other borrowing costs across the economy. If the rally is sustained, the relatively steep decline in bond yields could have major implications for markets and the economy.
Higher yields hurt stocks by driving up borrowing costs for businesses and consumers and threatening to slow the economy. They can also make stocks look less attractive by giving investors a higher return for holding risk-free government bonds to maturity. Lower yields achieve the opposite effect.
The bond rally has given investors the confidence to bet on rate cuts, especially since the US Federal Reserve (Fed) released its latest forecasts followed by an encouraging consumer-price index report.
Stocks have managed to defy rising bond yields for much of this year, fueled in part by investor excitement about artificial intelligence. Even so, equities have stumbled whenever the 10-year bond yield has climbed especially high.
At the start of the year, investors were full of confidence about the outlook for rate cuts after a string of good inflation reports. Then they got a rude awakening when progress stalled over the next three months.
But in the last few weeks, investors have been pleased by signs that the labour market is cooling, a trend that should make it easier for inflation to keep falling. Despite robust job growth, the unemployment rate in the US ticked up to 4% in May from 3.4% in the middle of last year. Job openings have also declined sharply, as has the number of workers voluntarily leaving their jobs in pursuit of new ones. In Australia, there are many signs that the economy is growing only slightly above the stall rate.
Still, none of this has generated much concern among investors that the economy is losing too much momentum. But if bond yields can keep dropping, so much the better. Regardless of when the Fed starts cutting interest rates, investors expect that the central bank will only stop at much closer to 4.0%, from their current target range of 5.25% to 5.5%. And the Reserve Bank of Australia will not be too far behind.