Australian bond yields are on course to drop to an all-time low after the central bank left the door open for an interest-rate cut.
The benchmark 10-year yield fell to 2.35% on Tuesday in Sydney, approaching the record of 2.25% set in February 2015. The yield tumbled about a quarter percentage point in January and again last month. Australia’s government bonds returned 2.7% in the first two months of this year, the most since the period ended January 2015, according to a Bloomberg AusBond index.
With the economy having lost jobs in December and January, and the Reserve Bank of Australia’s inflation gauges holding near the bottom of its target range, bonds are climbing as traders anticipate the central bank will cut interest rates by August. Policy makers reiterated on Tuesday that low inflation would provide scope to ease policy if necessary, while keeping the cash rate at a record-low 2%.
“We’ll see below 2% this year” for the 10-year yield, said Toshifumi Sugimoto, the chief investment officer at Capital Asset Management in Tokyo. “Their comment is dovish. It’s not hawkish. Given the low inflation rate, they want to ease.”
Sugimoto, with 30 years of experience in fixed income, says he’s been buying sovereign debt and highly-rated state bonds such as those issued by New South Wales and Queensland this year.
Swaps traders are anticipating one interest-rate cut within the next six months, based on market prices compiled by Bloomberg. Governor Glenn Stevens on Tuesday amended the statement accompanying the RBA’s rate decision to say low inflation “would” provide scope for the central bank to act. After the previous policy meeting in February, he had used the word “may.”
“The RBA appears to have strengthened its easing bias somewhat,” Shane Oliver, head of investment strategy at fund manager AMP Capital Investors in Sydney, wrote in a report.
Australian bonds have been swept up in a worldwide debt rally this year as tumbling stock and oil prices have driven investors to the relative safety of government securities. Their AAA credit rating has helped attract investors along with the extra yield they offer over other bond markets. German 10-year yields were at 0.11%, while those on comparable Japanese debt were minus 0.07%. Australia’s economic indicators are showing signs of flagging. The value of iron ore exports to China is at a three- year low, Sydney home prices are off their peak and home building permits slid in January. Wages are growing at the slowest pace on record and the jobless rate unexpectedly climbed to 6% in January.
The local dollar has strengthened in four of the five past months, making the nation’s exports more expensive to overseas buyers. It was at 71.37 US cents on Tuesday.
The trimmed mean index of consumer prices rose 2.1% in the fourth quarter from a year earlier, within the central bank’s target range of 2% to 3%. The weighted median gauge advanced 1.9%. Both indexes exclude the most volatile items.
Bond bulls are in the minority. Ten-year yields will approach 3% by year-end, based on a Bloomberg survey of economists in which the most recent forecasts are given the heaviest weightings.
China is working to improve its economy, which will benefit Australia, said Hiroki Shimazu, senior market economist in Tokyo at SMBC Nikko Securities, a unit of Japan’s second-largest lender.
The People’s Bank of China said on Monday it’s cutting the amount of cash the nation’s lenders have to hold as reserves. Aussie yields are more likely to rise than fall, Shimazu said.
Mizuho Asset Management is one of the bulls. “Australia is one of the most attractive bond markets,” said Yusuke Ito, a senior investor in Tokyo for the company, which oversees about $44.3bn. The record low may come within a month or two, he said. “It’s quite possible.”