(Bloomberg) -- Australia’s three-year bond yield dropped below the central bank’s policy rate for the first time since September 2016, underscoring how growth jitters are fueling bets for interest-rate cuts globally.
Yields on three-year debt -- more sensitive than longer maturities to rate moves -- dropped as much as five basis points to 1.495 percent. The Reserve Bank of Australia, which highlighted concerns over consumption growth in its March meeting minutes published Tuesday, has kept its cash rate target at a record-low 1.50 percent since August 2016.
Speculation the RBA will cut rates has intensified as data including retail sales and business confidence have shown the economy is slowing due to a property market slump and global trade frictions. Bonds have rallied globally as central banks from the U.S. to Australia shifted away from plans to only tighten policy amid expectations of cooling economic growth.
“Historically when three-years have traded through, the RBA has usually cut anywhere three to eight months after,” said Prashant Newnaha, senior rates strategist at TD Securities in Singapore. While TD expects the central bank to remain on hold, “we have recommended investors be positioned for lower yields,” he said.
RBA policy makers think rates should stay on hold due to a divergence between growth in the labor market and a slowing economy, according to minutes of the March 5 meeting. The labor market is “particularly important” to the policy outlook and there remains considerable uncertainty over consumption, according to the minutes.
Traders are focusing on the latest jobs data report due Thursday, with the central bank next meeting on April 2. Westpac Banking Corp., JPMorgan Chase & Co., Macquarie Bank Ltd. and UBS Group AG all predict two 25 basis-point rate cuts this year.
Australia’s bonds have returned 2.6 percent this year, the best performers among Group-of-10 economies, according to data compiled by Bloomberg. Ten-year yields fell as much as five basis points on Tuesday to 1.93 percent.
Fund manager QIC Ltd. has been buying shorter-maturity Australian bonds on wagers the RBA will stay dovish, while Ardea Investment Management’s Tamar Hamlyn sees three-year yields possibly falling as low as 1.20 percent.
Investors “have become increasingly confident that the RBA will need to lower its cash rate, and likely more than once, this year,” said Andrew Ticehurst, a rate strategist at Nomura Holdings Inc. in Sydney. “The recent decline in European and U.S. long-end yields is also contributing to the rally at the long end of the Australian curve.”
Traders in Japan are also paring back bets that the Bank of Japan would dial back its ultra-loose monetary policy. A 20-year bond auction Tuesday drew the highest demand in five years, underscoring how Japanese investors are also returning to JGBs given lower yields elsewhere.
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