(Bloomberg) -- Australia’s 10-year bond yield dropped to the lowest against its U.S. counterpart since the 1980s this week and the gap is set to keep widening.
The discount swelled to 24 basis points on Tuesday, from a premium of more than 2.5 percentage points in 2010, after the Reserve Bank of Australia last week left its benchmark interest rate at a record low where it’s been since August 2016. While inflation is expected to return to target as unemployment falls, progress is likely to be gradual, the central bank said in its policy statement.
The Federal Reserve, which has raised rates six times since December 2015, said it plans to tighten further as economic conditions improve. Overnight-index swaps suggest the policy differential between the U.S. and Australia will triple to 60 basis points during the next two years.
Australia’s 10-year yield dropped below that of its U.S. counterpart in February for the first time since 2000. The discount of 24 basis points on Tuesday was the widest since October 1981, according to data compiled by Bloomberg based on closing prices.
“We think the U.S. 10-year bond yield can end the year around 3.3 percent -- if not even a little higher -- which will give Aussie yields some further upside as well, but it’s hard to see Aussie yields above 3 percent by the end of the year,” said Diana Mousina, senior economist at AMP Capital Investors Ltd. in Sydney. Mousina doesn’t expect the RBA to raise rates till 2020.
The 10-year Treasury yield was at 2.98 percent at 1:48 p.m. in Sydney. The comparative Australian bond yield traded at 2.77 percent. The Aussie was steady at 74.67 U.S. cents.
While the gap could widen to as much as 55 basis points by the end of the year, if the Australian dollar weakens to below 68 U.S. cents, that “would trigger badly-needed inflation, which would allow the RBA to possibly move,” said Charlie Jamieson, chief investment officer at Jamieson Coote Bonds in Melbourne.
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