Australia's 18-Year Yield Premium Over Treasuries Disappears

(Bloomberg) -- Australia’s yield premium over Treasuries vanished on Thursday for the first time since the turn of the century.

Treasury yields have jumped this year as traders repriced the pace of rate hikes by the Federal Reserve following stronger-than-expected wage and price increases. The Reserve Bank of Australia though has been at pains to signal that its policy will stay on hold.

The latest rise in Treasury yields was fueled by robust inflation data on Wednesday. As the spread came close to zero on Thursday when both markets were trading, volatility picked up, and it moved quickly into negative territory, prompting speculation of positions being unwound.

A flat-yield spread between the securities may be here to stay as the median forecasts in Bloomberg surveys for 4Q 2018 show Australia and U.S. 10-year yield at exactly 3.02 percent. The last time the spread fell to zero or turned negative was June 13, 2000.

Traders have been marking down rate expectations in Australia. Markets had priced in a full 25 basis hike by December just weeks ago, and now only see a 62 percent probability of that happening. The Fed though has signaled plans to hike three times this year, with Goldman Sachs Asset Management seeing a possible fourth increase.

Still, concern that the disappearance of the premium would lead to weakness in the Australian dollar seems to be misplaced. Back in 2000, the Aussie traded at 59.63 cents to the U.S. currency, well below the 79.49 cents as of 6:03 p.m. in Sydney.

According to Jeremy Lawson, formerly an economist at the RBA, Australia’s terms of trade and commodity prices are now a better indicator of the Aussie outlook. Lawson, now the chief economist at Aberdeen Standard Investments, said Feb. 7 that there’s little value in looking at the spreads for the currency’s direction.

--With assistance from Patricia Lui

To contact the reporter on this story: Stephen Spratt in Hong Kong at sspratt3@bloomberg.net.

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Shikhar Balwani

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