Brent crude tops $108 as Australian bond yields hit 15-year high

Markets price 80% odds of RBA rate hike on 29 September

The international oil benchmark Brent crude pushed toward US$110 a barrel on Friday before settling above US$108, its highest level since mid-May. CBA’s head of commodities research Vivek Dhar, who is based in Singapore, said meetings with energy producers and traders on the sidelines of a major energy conference over recent days revealed a deep sense of uncertainty about how the next six to 12 months will play out.

Dhar said he expected Brent crude to swing between US$70 and US$100 a barrel for the foreseeable future, until eventually the world becomes comfortable with the supply workarounds to a restricted Strait of Hormuz. But the more pressing worries were around the supply of refined products, particularly diesel. “Everyone pays attention to oil, but it’s the refined product that hits the economy and feeds through to inflation,” Dhar said. “And that is what everyone is worried about, because there isn’t any workaround; we just need disruptions to stop.”

Australian motorists are expected to feel the impact at the pump within weeks. Unleaded petrol prices could push from about $2.10 a litre in major east coast cities to about $2.30 over the next couple of weeks, according to a rough rule of thumb that every US$1 increase in the crude oil benchmark translates to a 10c increase at the pump. Diesel prices could rise by 10-30 cents per litre from over $2.50 per litre currently, Dhar warned.

The oil price surge has rippled through bond markets. Investors pushed the US 10-year Treasury yield to 4.83% on Friday — approaching 5% for the first time since 2007 — as the prospect of higher energy costs firmed up expectations that the US Federal Reserve would need to raise interest rates again. The selloff dragged Australia’s 10-year bond yield up to 5.38%, to fresh 15-year highs.

The bond move came as investors dumped stocks and bonds. Investment strategist Steve Miller of fund manager GSFM said bonds were reacting to what he described as a “deadly cocktail” of high oil prices, American fiscal irresponsibility, and worries around the independence of the Federal Reserve.

Adding to the alarm, US President Donald Trump this week promised to give every US adult citizen a US$5,000 “dividend” after the November midterms if Republicans win. Miller said the pledge was “a great example of Trump’s unwillingness to tackle the deficit, and even to make it worse for short-term political expediency. No wonder bond markets are sketchy.”

The bond selloff has weighed on the local sharemarket. The benchmark S&P/ASX 200 index was on track on Friday to end the week down 3%, below the level it was a year earlier. Since the start of the US-Israel war on Iran at the end of February, the US S&P 500 index is up about 10%, while the ASX 200 has fallen roughly 5%.

JP Morgan Asset Management’s chief market strategist for Asia-Pacific, Tai Hui, said rising long-term borrowing rates would normally undermine stock valuations, as investors reconsider the relative trade-off between the risky sharemarket and climbing yields on safe bonds. But ongoing optimism about the global economy and, in particular, the boom in artificial intelligence investment was providing a tailwind, Hui said, especially on Wall Street.

The Hong Kong-based Hui said the increasingly debated question among investors was at what point the steady march higher in yields begins to drive a broader and deeper switch out of stocks and into bonds. “We are approaching a crossroad,” he said.

Financial markets are pricing in an 80% chance the Reserve Bank of Australia delivers a fourth rate hike on 29 September. Separately, Jonathan Kearns, the chief economist at Challenger and a former top RBA official, said the central bank would need to respond to recent evidence that inflationary pressures were not easing as hoped, even as the economy proved resilient. “I think they [the RBA] will go in September,” Kearns said.

Kearns said the central bank’s inflation-fighting credentials were increasingly at stake. “They need to get inflation to 2.5%, and that’s not forecast to happen until early 2028; that then becomes almost a seven-year inflationary episode.”