Emma Lawson

Market review

A hiking Reserve Bank of Australia (RBA), balanced against a global risk off environment, resulted in the Australian bond market, as measured by the Bloomberg AusBond Composite 0+ Yr Index, rising 0.88%.

The RBA kick started the hiking cycle in February, increasing the cash rate 25 basis points (bps) to 3.85%. Three‑month Bank Bill Swap Rates (BBSW) rose 15bps to 3.99% and six‑month BBSW 24bps to 4.33%. The three‑year government bond yield eased 5bps to 4.22% and ten‑year yields declined 16bps to 4.65%, resulting in a flatter domestic yield curve.

The global environment outweighed the RBA’s hawkishness as a myriad of intersecting concerns materialised. Broad questions are being asked of the implications of artificial intelligence (AI) for a range of economic sectors and broad labour markets. This has also led to questions relating to credit markets, private credit and software profitability. Time will tell with these themes, but it weighed on sentiment and generated uncertainty. Global economic activity was generally stable, with market focus elsewhere.

Australia isn’t immune from these themes, but the local dataflow has been more instrumental. Headline CPI rose 3.8%, unchanged from the prior month, while trimmed mean CPI was 3.4%, up from 3.3%. This was higher than expected, and increases were broader based than in prior months. The RBA are concerned about the persistence of inflation, so this was an unwelcome outcome. Labour market conditions remained firm, with the unemployment rate at 4.1% in January, with supportive inputs. The NAB Business Survey showed business conditions moderating slightly. Consumer sentiment weakened following the RBA move, with the Westpac–Melbourne Institute Consumer Sentiment Index falling to 90.5 in February from 92.9 in January, household spending was also weaker in the month.

Under these conditions, the RBA remain highly data dependent, and the advent of Middle East tensions at month end are likely to increase policy path uncertainty. The domestic economy shows signs of general resilience, but the global backdrop has the potential for disruption.

Market outlook

We see the RBA continuing to raise interest rates, to above what the market currently anticipates over the life of the current cycle. Our high case is one where inflation remains elevated and the RBA are forced to raise interest rates more than expected into 2027. Our low case reflects a weaker economic outcome, if global uncertainties are renewed and the labour market deteriorates. We hold no tilt at present. We hold a small long duration position, targeted on the curve, and remain vigilant to take advantage of market mispricing.

Monthly focus – AI productivity in the Australian context

Australia has always embraced general purpose technology (GPT) and adapted it to suit our unique economy. The AI transformation is expected to be no different. Using the Organisation for Economic Co-operation and Development (OECD) study of productivity gains from AI as a guide, we assume that AI will raise productivity levels in the Australian economy over the coming decade, as technology augments employees across the sectors Australia has a comparative advantage in. Rising productivity, given it is a significant input, leads to a higher neutral interest rate in the medium term.

The OECD examined the productivity benefits of AI^[1] across the G7 economies. Their process applied a number of increasingly common methodologies studying this topic and pulled them together. First, they note the impact on specific tasks, then the exposure of tasks in industry sectors, finally the rate of adoption for the economy. If we put this in an Australian context, the industries in which AI is likely to augment work feature highly in the economy^[2]. Jobs and Skills Australia note that only 4% of the workforce have full automation exposure, while 96% have medium to high AI augmentation, where AI can be used to support and enhance worker output.

AI augmentation is expected to be high in significant industry sectors of the Australian economy. Knowledge based services are heavily positively impacted, such as the IT sectors, finance, professionals and telecoms. Less impacted are agriculture, mining and construction. Although, there are examples of increasing use in these sectors as well. This also raises the point that there are use cases and new roles that we haven’t even envisioned as yet. Australia’s GDP is weighted toward the knowledge-based activities, except for mining. If we cross reference the OECD’s top 25% of industries benefiting from AI, Australia’s production in these sectors accounts for around 34% of GDP. Given this, we can assume that the benefits from AI enhancing productivity comes at the upper end of estimates.

The final part of the productivity puzzle is when can we expect the benefits to flow through. Australia has an interesting history when it comes to adapting to new technology. We often hear that the AI benefits for the Australia economy are “years” away, thus assuming we are a slow adopter of new technology and benefit less from the creation of new technology. However, Fleming et al^[3] note in a pre-AI study, that Australia tends to adapt new technology to suit the local specialisations and adopt new technology fully in time. Australia imports new patents in broad industries and then specialises in what Australia does well. This seems like an appropriate template for AI adoption. We might not create the underlying technology, but are likely to embrace it, and in specialised, comparative advantage sectors, embrace and enhance its use. As the 2025 Nobel prize for economics theory would suggest, it isn’t just the innovation itself but the willingness to use these in practical applications which drives sustained economic growth^[4].

Given this, we would assume, in the OECD phraseology and methodology, that Australia is most likely to follow a more medium pace of adoption. This assumes that firms follow an s-shaped profile, raising their adoption of AI technology to around 50% of firms by 2034. Their 10-year horizon started in 2022, on the official start of the technology and uses the latest digital technology adoption as a guideline. The build up tends to be a slow rise, with a more rapid profile from 2030 onwards. This is, of course, highly uncertain and many assumptions underpin the academic research.

In turn, given the exposure to AI tasks and assumed adoption rate, the OECD estimates applied to the Australian environment would suggest an additional 0.5 – 0.8 percentage point (ppt) increase in annual labour productivity. This is above the estimates from the Australian Productivity Commission (0.4ppts), and below the OECD estimates for the United States. We would assume large uncertainty bands around the assumption.

By Emma Lawson, Fixed Interest Strategist

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Views as at 2 March 2026.
Notes:
[1] Macroeconomic productivity gains from Artificial Intelligence in G7 economies”, OECD publishing, OECD Artificial Intelligence papers, June 2025, No. 41.
[2] Jobs and Skills Australia – our Gen AI Transition, Implications for Work and Skills, 14 August 2025.
[3] Fleming, Liu, Merrett and Ville, “Australian innovative activity and international technology 1854-2016, European Review of Economic History, 2024
[4] https://www.nobelprize.org/prizes/economic-sciences/2025/popular-information/

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Emma Lawson

Market review

Australian bond markets saw further repricing of the Reserve Bank of Australia (RBA) in October. The Australian bond market, as measured by the Bloomberg AusBond Composite 0+ Yr Index, rose 0.4%. The RBA maintained the cash rate at 3.60% at end September, as was expected. Three-month bank bills rose 6 basis points (bps) to 3.64% by month end. Six-month bank bill yields rose 13bps to 3.88%. Australia’s three-year government bond yields ended the month 6bps higher, at 3.60%, while 10-year government bond yields were unchanged at 4.31%.

The Australian economy is handing the baton of economic growth from the public sector to the private sector. There are inevitably conflicting economic signals through this process as the transition is unlikely to be perfectly timed. Amidst it all, inflation is rising, while the labour market softens. As this occurs, it is more likely that the markets vacillate on the expected interest rate profile. This was evidenced as views on the RBA went full circle in the month. RBA Governor Bullock was hawkish at their early October meeting, with a renewed focus on inflation risks and downplaying labour market softness. Post weak consumer confidence, soft job advertisements and most importantly a rise in the unemployment rate to 4.5%, easing pricing was partially returned. There was a further reversal post a significantly stronger inflation print than expected late in the month. Australian third quarter CPI rose to its highest level in over a year, to 3.2%yoy, and the trimmed mean rose to 3.0%yoy. These were both higher than the RBA had forecast, and lowered the probability of further easing until inflation proves less worrisome.

The dichotomy of rising inflation and slowing employment is not constrained to Australia alone. This theme is being felt in a number of advanced economies, including the United States. The US Federal Reserve lowered interest rates in October, as expected, due to weakening employment, but they warned on rising inflation. The US outlook is less clear, in part due to the ongoing government shutdowns, which mean there is no government economic data releases.

Market outlook

With inflation higher than the RBA are comfortable, markets priced out much of the last phase of the easing cycle. There is one more easing priced in through 2026. We pushed out our expected base case for easing to H1 2026, reducing it to two more cuts to 3.10%. This leaves policy above our estimate of neutral. Our low case reflects a weaker economic outcome and the RBA easing by a total of 250bps. We allocate a modest weight to the low case. We hold a relatively neutral duration position, while we remain vigilant through the volatility to take advantage of two-way mispricing.

Monthly focus – Intertwining of long-term themes

The world is awash with a number of big economic themes. These global themes, whose impacts on economies will be fully felt over years, not just months, are however, playing out in the current economic data and shaping financial market expectations. Inevitably, the inherent conflicting influences generate volatility in data and financial markets. This makes forecasting more complicated, but it also creates opportunities. We take a brief run through a number of the key themes currently in play.

This month the focus was on the boom in artificial intelligence (AI), and how this is going to shape economies, as well as investments. The economic benefits of profound technological change tend to take years to develop in full. There are question marks about the rapidity of AI adoption, and the fact that it may be faster than prior technological change periods. If true, higher productivity and potentially lower employment may come faster. Capital expenditure necessarily also needs to rise, and this impact is currently in play in some countries.

The economic impacts of climate change, both the transition to a less carbonised world, as well as warming itself, continues. We wrote about this last year. The capital required to facilitate the transition is now competing with, and in some instances, complimenting the energy needs of the AI transformation. We can expect higher capital expenditure and higher inflation from this theme.

Recent months have highlighted the deglobalisation theme, in the guise of trade disruptions. Less global geo-political co-operation is more likely to result in sub-optimal economic outcomes. Higher tariffs and trade barriers have historically led to lower economic growth and higher inflation. This can take time to flow through, and the present cycle does appear to be slow to show up, but it is having an impact. China’s international trade is rotating away from the US and US inflation experiencing higher tradeables inflation are just some examples. We should expect these themes to continue through the coming year.

Fiscal policy and high levels of government debt in some major economies is also having a strong influence on markets. Many governments did not take steps to reduce net government debt post the global financial crisis (GFC). This has led to less sustainable debt levels post the pandemic. Penalties are being extracted in the economies with high levels of both government debt and poor external balances. The existence of so-called twin deficits has seen higher bond yields. Japan, the United Kingdom and France are some examples. This theme is likely to remain, and potentially worsen, until such time as deficits are addressed. Australia is comparatively well positioned, but slippage would be unwelcome.

A related theme is fiscal dominance, where the existence of significant government debt levels influences sub-optimal policy in other spheres, such as monetary policy. Setting monetary policy in such a way as to address debt levels, explicitly or implicitly, rather than inflation targeting, has consequences. This theme has become a topic of conversation amongst economists as a possibility, rather than being evident at present. In a World where sub-optimal policy can no longer be dismissed, markets are attuned to any possibility of fiscal dominance.

Economic inequality is a further trend driving economic outcomes and creating uncertainty. This is being referenced as the “K” economy and explains some of the outcomes in the US where it can be applied to the AI economy versus the rest of the economy. In Australia, speak to any cohort with a build-up in assets and they are doing well. Wealth is rising and confidence is higher. Contrast this with cohorts without a build-up in assets, and the feeling isn’t necessarily mutual. There is uncertainty over employment, concerns over the high cost of living and poor housing affordability. This is borne out by a rise in the Gini co-efficient in Australia post the GFC, but also more pronounced in countries such as the US. Rising inequality has the power to influence geopolitical outcomes, but also create anomalies such as low consumer confidence and stronger consumer spending.

Demographics, including ageing and migration, are also influencing current economic outcomes, and will be doing so for decades to come. The rapid migration cycle through and post the pandemic continues to influence economic growth, and labour markets, in a number of economies. Population growth is expected to modestly ease further in Australia, where it has already reduced monthly labour replacement needs. This weighs on supply, but also demand. Alongside this, overall ageing demographics alter savings demand and supply, as well as labour supply and demand.

Through these crosscurrents we find it is best to track what underlying fundamentals and historical precedent advise us about how economies behave. Anomalies will come, and go, deciphering the news from the distraction is key.

By Emma Lawson, Fixed Interest Strategist – Macroeconomics in the Janus Henderson Australian Fixed Interest team

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Emma Lawson

Market review

Markets pushed back the US Federal Reserve’s first interest rate cut, amid consensus of a soft economic landing. This allowed most yields to trade around the recent ranges. Against this backdrop, the Australian bond market, as measured by the Bloomberg AusBond Composite 0+ Yr Index, fell 0.30%.

The Reserve Bank of Australia (RBA) kept policy unchanged at 4.35% in February, as expected. Global moves continue to be a strong influence, as the debate over the strength of the cycle and policy easing rages. Australian three-year government bond yields ended the month 13 basis points (bps) higher at 3.70%, while 10-year government bond yields were 12bps higher at 4.14%.

Against the current cash target rate of 4.35%, three-month bank bills ended 1bp lower at 4.34%. Six-month bank bill yields ended 5bps higher at 4.48%.

There is more consistency around the global start of the major market easing cycles, with markets now looking at mid-year for rate cuts to commence. Europe is expected to be first off the blocks in June, with the US thereafter. To date, most cutting cycles are expected to be historically modest. Market pricing adjustments have been fewer in the local market, but there is more consensus on an Q3 kick-off, and a limited move.

Global inflation is falling, but proving to be stickier, just above central bank targets of ~2%. A surprise US CPI result triggered a peak in the bond sell-off mid-month. This was brought back by subsequent mixed data but highlights that the easy inflation moderation gains are behind us. The Australian monthly CPI was a little lower than expected, but steady rather than falling, at 3.4% yoy. The real side of the economy is slowing at the margins, and employment disappointed with the unemployment rate rising to 4.1%. There remain some distortions in the data, making the monthly noise higher than usual. The RBA recognise this, and at their meeting and subsequent public commentary highlighted they remain highly data dependent for now.

In risk markets, a consistent theme during Corporate Reporting Season was one of resilience and robust fundamentals, particularly for Investment Grade issuers. When combined with evidence of slowing inflation and expectations of an imminent rate cutting cycle, this catalysed an impressive credit rally as institutional investors including pension funds, insurers and annuity providers, sought to lock-in attractive yields from high-quality liquid assets. Easing financial conditions and a pick-up in M&A activity encouraged Corporates to bring forward issuance plans to meet investor demand, resulting in a raft of corporate bond supply.

The domestic market was extremely active with numerous issuers issuing bonds. Both financial and non-financial issuers were represented, and transactions spanned the capital structure. Notable transactions from financials issuers included Tier 2 bonds from NAB and Macquarie Bank, together with ASX Listed Hybrids from ANZ and Bendigo & Adelaide Bank. Notable transactions from non-financial issuers included senior bonds from Telstra, Perth Airport and neighbourhood convenience REIT Region Group. Transactions were well over-subscribed with investors showing increasing appetite to lend in longer tenors. Asset-backed markets were likewise busy.

The Australian iTraxx Index ended 5bps tighter at 63bps, while the Australian fixed and floating credit indices returned -0.04% and +0.51% respectively.

Market outlook

Our base case is for the RBA to remain on hold at current rates before commencing an easing cycle in August 2024. We price a more modest than historically average easing cycle, of around 175bps, spread over 12 months. We see the risks skewed to the downside, with a rising probability that the RBA may have to move earlier and slightly faster than our base case. In this scenario, the RBA starts moving in August 2024, with a total of 250bps of cuts, to below neutral interest rates.

The RBA released its new format Monetary Policy Statement, modestly downgrading their GDP forecasts, as well as their CPI expectations; but maintain there is a high degree of uncertainty. The data has backed up this uncertainty, with a high degree of volatility. Unemployment has risen to 4.1%, wages sit at 4.2% yoy, and the retail data has bounced a less than expected 1.1% mom.

We see the very near-term RBA pricing as relatively in-line with expectations. However, the expectation of policy rates held above neutral over a period of years continues to underestimate the cyclical risks. We currently consider the Australian yield curve as under-valued at points in the curve. We hold a long duration position and look to add to it on any worsening of the economic outlook.

In recognition of the complex macroeconomic environment, our credit strategy remains skewed towards high-quality, investment grade issuers with resilient business models, solid earnings power and conservative balance sheets. We have been actively and selectively taking advantage of the attractive yields on offer in highly rated corporate bonds and structured credit, particularly in the primary markets where transactions have come with new issue concessions. While we believe that the cumulative impacts of restrictive financial conditions will become evident, we are mindful of a healthy starting point of above full employment and sound corporate fundamentals. As such, we remain open-minded to a wider range of potential economic outcomes including those involving a soft-landing.

Backed by fundamental research and experience, we also continue to identify pockets of opportunity where perceived risks have been overly discounted into the valuations of what would traditionally be considered stable and sustainable credits. In such instances, a strong case can be made for capital gains over-and-above already attractive cash yields, setting up for attractive risk-adjusted returns for patient investors with a medium-term investment horizon. We continue to judiciously seek out, create and access such opportunities, while simultaneously preserving significant capacity to take advantage of opportunities arising through future market dislocations.

By Emma Lawson 

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As a senior member of the team, Emma will contribute to the investment strategy decision making process across all portfolios, conduct research for the investment team and contribute to the generation of active interest rate strategies that help achieve investment performance objectives.

Emma brings more than 25 years’ experience as a financial markets’ macroeconomist and strategist across investment management, investment banking and government sectors. She was most recently at Treasury Corporation of Victoria where she was responsible for providing views and analysis on the global and Australian economy to a large range of clients. Prior to this Emma held roles across National Australia Bank, Morgan Stanley and Merrill Lynch where she largely focused on combined macroeconomics and currency investment strategies roles. Emma has a Masters in Economics from the University of Adelaide.

Jay Sivapalan, Head of Australia Fixed Interest at Janus Henderson Investors said:

“Emma’s hire was a result of a thoughtful, patient and extensive search. Every member of the Australian Fixed Interest team was involved in her appointment and reached a unanimous agreement on her selection. We are delighted to welcome such a well-established, seasoned and high calibre economist. I know every member of our team is looking forward to working with her to deliver exceptional investment outcomes for our clients”.

Emma’s appointment enables the planned and phased retirement of Frank Uhlenbruch, who has decided to retire from the from the funds management industry after a long-standing career spanning over 39 years, including 28 years at Janus Henderson. Frank is due to retire in the second half of 2023 and will work closely with Emma to ensure a smooth transition and handover of responsibilities before his departure.

Jay Sivapalan, continues: “Whilst Frank will be with us for some time yet in order to ensure a smooth transition, I want to express that it has been a real privilege and pleasure to work alongside him. He has been a valued member of the investment team and has tirelessly put the needs of our clients first over the journey.  His experience and friendship will be missed. We look forward to keeping in close contact with him as he embarks on the next chapter and wish him well for the future.”

Matt Gaden, Head of Australia at Janus Henderson Investors said: “Emma’s appointment and smooth transition will ensure that clients and their investment outcomes driven by a long-standing repeatable process that has been in place for over two decades will be seamless.”

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