| Date 29 June 2026 Status For Discussion – Not a Recommendation to Act BOTTOM LINE Brent has broken its pre-conflict support near US$73 and the US 10-year has broken support at 4.42%, both despite live Middle East supply risk. We read the pair as the market pricing slower US growth. That is dovish for the Fed and rhymes with the leverage-unwind tail flagged by a major investment bank’s rates desk. It does not, however, disturb our domestic view: the RBA stays on a path to a 25bp hike in the December quarter on cost-push inflation. The investable conclusion is a widening US–Australia policy divergence — supportive of running AU carry at the front, with scope for a rally at the long end of the ACGB curve given the 10-year’s ~35bp premium to US Treasuries, cautious on credit beta, and modestly constructive on AUD. |
The technical signals
Two charts moved through levels we had been watching, and both did so against the grain of the prevailing supply-risk narrative — which is what makes them notable.
Oil. Brent has been weak through June despite the back-and-forth over the Strait of Hormuz, closing at US$72.92 (–3.1% on the day, RSI ~26). The break of support at ~US$73.20 — the top of the pre-conflict range — is the significant development; that level should now act as resistance. Renewed attacks on shipping and US responses would normally delay a return to free transit and keep a risk premium bid, yet the market has shown a striking tolerance for that risk. When price refuses to respond to a supply shock, the message is usually on the demand side.
Brent crude (daily) — break of the ~US$73 pre-conflict support band, RSI oversold. Source: StockCharts, 25-Jun-2026.
US 10-year. With little fanfare, the 10-year yield broke key support at 4.42%, closing around 4.37% and tracing a clean descending trendline from the May highs near 4.68%. That 4.42% level now becomes resistance. A lower 10-year, absent a fresh growth scare, is consistent with the market beginning to discount softer US activity.
US 10-year Treasury yield (daily) — break of 4.42% support; descending trendline from the May high. Source: StockCharts, 26-Jun-2026.
Macro read-through
Taken together, weaker oil and a lower 10-year point the same way: the market is sniffing slower US growth over the next twelve months. Oil is the cleaner tell, because it is falling through a supply shock that should support it; the demand signal is overriding the geopolitics.
This dovetails with work we have reviewed from a major investment bank’s rates strategy team, which argues that a narrow, leverage-dependent US equity rally is vulnerable to a self-reinforcing deleveraging episode as equity-financing costs rise. In that framework, financial conditions had quietly tightened — driven partly by higher 10-year yields and a stronger dollar — and the first thing to be repriced in any unwind is the tail of further Fed tightening. A 10-year now breaking lower is the early, benign version of exactly that repricing.
Why this does not change our RBA view — and why that is the point
The natural worry is that falling oil undercuts our cost-push inflation thesis and, with it, the case for a December RBA hike. It does not, and the distinction matters. Cheaper fuel is disinflationary for the headline — it has already taken an estimated ~35bps off the quarter relative to flat fuel — but our thesis rests on underlying, domestically generated cost pressure: new dwelling construction running at 5.6% YoY, rents reaccelerating toward 4%, broad market services, and the Fair Work 4.75% award increase taking effect 1 July. None of that is set by the oil price. Weaker oil softens the headline optics while the core story the RBA actually targets keeps building.
So the US and Australia are being pulled in opposite directions. US technicals and the leverage backdrop argue for a Fed that leans dovish; our domestic cost-push read keeps the RBA on a path to a 25bp hike in the December quarter, with a conditional further move in 2027 should strong money supply growth and then a broadening in wages materialise. The strategic frame for the book is therefore a widening US–Australia policy and rate divergence.
The long end: scope for an ACGB rally
A separate opportunity sits at the long end of the domestic curve, and it works alongside the divergence theme rather than against it. The Australian 10-year currently trades at roughly a 35bp premium to the US 10-year. With the US 10-year having broken support and biased lower on the growth signals above, that premium gives the long end of the ACGB curve both a yield pickup and room to compress — the local 10-year can follow the US anchor lower and narrow the spread at the same time. On that basis we see scope for a rally at the long end even as the RBA tightens at the front.
The result would be a flatter curve — the front end anchored higher by the December hike path, the long end pulled lower by global growth signals and spread compression to Treasuries. We hold this as a constructive case rather than a certainty: the same premium also embeds Australia’s higher cash rate and domestic inflation risk, and if cost-push pressure dominates long-end pricing the premium could hold or widen rather than compress. The rally case therefore depends on the global growth signal continuing to lead the domestic inflation premium at the long end — which is why the US 10-year’s behaviour around 4.42% is the level we are watching most closely.
Implications for IC discussion
Framed as considerations rather than recommendations to transact:
- Duration. The divergence splits the curve. We keep AU front-end duration light into the December quarter, where we expect the next move to be up; but the long end is more constructive, with the 10-year’s ~35bp premium to Treasuries giving scope for an ACGB rally. Any USD-rate exposure also benefits directly from the US 10-year breakdown.
- Curve. Front-end-light, long-end-constructive expresses as a flattener: the December hike anchors the front while the long end follows the US lower and compresses the premium. The position is most exposed if domestic cost-push pressure keeps the long-end premium wide.
- Carry over duration. The setup reinforces our existing preference — elevated BBSW and a higher-for-longer domestic front end favour running income and carry rather than reaching for capital gain from near-term AU easing.
- Credit. The deleveraging tail described above is the principal risk to spreads. Narrow breadth and concentrated leverage mean an unwind would gap AT1 and Tier 2 wider; we would not chase further spread compression here and would keep credit quality up.
- FX. An RBA hiking while the Fed leans dovish is, at the margin, AUD-supportive — though a genuine global risk-off (the deleveraging tail itself) would cut the other way and is the natural hedge consideration.
What would change our mind
The honest counter-case is that the same US signals, taken far enough, become a global growth scare rather than a soft landing. A disorderly deleveraging episode would be a powerful dovish force that could eventually drag even the RBA — a risk to the higher-for-longer view, not support for it. The watch items are concrete: whether the 10-year break extends or reverses back above 4.42%; whether oil stabilises or accelerates lower; the Q3 Australian CPI in late October as the trigger for the December move; and any sign that US equity-financing stress is turning from a chart signal into realised credit spread widening.
