Bloomberg
Australia’s government bonds are headed for their best year since 2011 as slumping commodity prices fuel calls for interest-rate cuts, pushing benchmark yields towards record lows.
The nation’s debt has returned 10.3% in 2014, outpacing gains of 9.9% in Germany, 5.7% for US Treasuries and 4.2% for Japanese bonds. Australia’s 10-year yield fell to 2.75% this month, approaching the record 2.698% set in June 2012. The yield will be around or below 3% for most of next year even as investors brace for higher US borrowing costs, according to Commonwealth Bank of Australia.
“Disappointing growth and inflation outcomes in Europe and Japan, and the resulting intensification of monetary stimulus, played a huge role in driving global bond yields lower in 2014, particularly higher-yielding markets like Australia,” Adam Donaldson, head of debt research at Commonwealth Bank in Sydney said in an interview on December 26. “Australia’s economic challenge is likely to remain intense for some time, keeping rate cuts on the table and 10-year yields under 3%.”
Slower economic growth and a decline in the inflation outlook have spurred traders to price in at least one rate cut by Australia’s central bank next year, compared with predictions for an increase as recently as September. The country’s 10-year bonds offer almost 1.7 percentage points more yield than the average for AAA rated developed-market peers.
Australian yields will climb at a slower pace than those in the US during 2015 as monetary policy in the two nations diverges, Donaldson said an in e-mail interview. The Reserve Bank of Australia will probably cut rates by half a percentage point in the first half, Commonwealth Bank predicts. Treasuries and Australian government securities due in 10 years and more have a correlation of 0.96, data compiled by Bloomberg show. A figure of 1 would mean they move in lock step.
Australian benchmark yields will rise to 3.65% at the end of next year, according to the median forecast in a Bloomberg survey of analysts. The yield was at 2.88% at the close of trading on December 24. Yields on similar-maturity US securities will increase to 3.01%, from 2.25% last week, according to a separate Bloomberg survey.
Australia’s economy is struggling to cope with the end of a once-in-a-century resources boom and a slowdown in China, which purchases more than 35% of Australia’s overseas shipments. The central bank has kept its benchmark cash rate at a record low 2.5% since August 2013.
The central bank acknowledged the market’s growing expectation of a rate cut even as it left its key rate unchanged at its December 2 meeting. Board members “noted that market expectations implied some chance of an easing of policy during 2015 and discussed the factors that might be producing such an expectation,” according to minutes of the gathering.
Australia’s economic growth unexpectedly slowed to 0.3% last quarter, the weakest in 18 months, as prices tumbled for iron ore, which accounts for one-fifth of the country’s export income.
Yields on five-year inflation swaps, which signal traders’ expectations for cember 24, the lowest le consumer prices, fell to 2.27% on De vel since 2009.
The extra yield on Australia’s 10-year bonds over similar-maturity Treasuries shrank to 57 basis points on December 23, the least since July 2006 and down from as much as 153 in March.
The spread will contract to 20 basis points by the middle of next year, Commonwealth Bank’s Donaldson said.
“The contrast between Fed tightening and RBA easing should result in further narrowing of the Australia-US 10-year spread,” he said. “We wouldn’t be surprised to see parity in yields in coming months.”