A RELENTLESS rally in Australian bonds has laid bare how little traders believe that the local central bank will defy peer pressure to stand firm with its hawkish tone.
With a total return of about 3 per cent over the past month, Australia’s bonds have led the regional rally and outperformed Treasuries. Investors are doubting the Reserve Bank of Australia’s (RBA) messaging that a cut in its cash rate, which currently stands at a 12-year high, is not on the horizon as central banks in New Zealand and the UK have already kicked off policy easing.
Australia’s moderating inflation and an uptick in unemployment is reinforcing bets that the RBA to start reducing rates as soon as this year. Aussie debt has also been buoyed by Treasuries, which are set for the longest run of monthly advances in three years.
“RBA protests about the cuts being priced are not being heard,” said Kenneth Crompton, a senior fixed-income strategist at National Australia Bank in Sydney. “The market perceives the RBA as a follower of offshore moves so as those markets shift towards faster cuts, the local bond market follows.”
The Bank of England, Riksbank and Reserve Bank of New Zealand have all cut rates by 25 basis points each this month, spurring calls for the RBA to do the same. The US central bank is also widely expected to follow suit next month given several Federal Reserve officials acknowledged there was a plausible case for reducing rates at their July meeting.
Aussie 10-year yields have fallen about 40 basis points over the past month to 3.92 per cent, the most in the region. The nation’s three-year yields dropped for the seventh straight week, the longest falling streak since 2013, with the swaps market pricing in one 25-basis-point rate cut this year.
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“Our sense is that this outperformance is a function of the market believing that the RBA’s next move is ultimately for it to cut,” said Prashant Newnaha, Singapore-based senior Asia-Pacific rates strategist at TD Securities.
Inflation watch
Australia’s inflation data for July due Aug 28 will be the next major catalyst for local debt. Easing price pressures may prompt a further rally, though the bonds may come under pressure if data supports the RBA’s hawkish stance. Consumer prices are forecast to rise 3.4 per cent year on year versus 3.8 per cent in the previous month, according to a Bloomberg survey.
However, any weakness in Australian bonds may present a buying opportunity for traders, said Damien McColough, Sydney-based head of fixed-income research at Westpac Banking.
“Australia sits very nicely on a global ‘reward-for-risk’ basis, being a high-yielding AAA sovereign,” McColough said. The valuation already looks stretched but 10-year yields may have the room to fall another 20 to 25 basis points, he added. BLOOMBERG
