Bond Bulls Bet on RBA Cut as Yields Decline Toward Policy Rate

(Bloomberg) -- Bond bulls are doubling down on bets for the first Australian interest-rate cut in almost three years.

The yield premium that investors demand to hold three-year notes over the cash rate shrank to nine basis points on Wednesday, the smallest gap since November 2016, reflecting rising bets for a rate cut. A similar narrowing occurred in 2014 and 2016 before the Reserve Bank of Australia embarked on an easing cycle.

Bond Bulls Bet on RBA Cut as Yields Decline Toward Policy Rate

Calls for an easing grew louder Thursday, after influential Westpac Banking Corp. economist Bill Evans said the central bank may lower borrowing costs twice this year. A report of escalating tensions with China added fuel to the fire, as traders speculated that a ban on Australian coal shipments would worsen the growth outlook.

“Bond yields have been falling around the world as central banks turn dovish, and Australia’s is no exception,” said Jeffrey Halley, a 30-year market veteran and senior analyst at Oanda Corp. in Singapore. “Could yields fall further? Yes, I say you’ll continue to see yields slide in the first half of the year.”

Reserve Bank of Australia Governor Philip Lowe appeared to have laid the groundwork earlier this month, when he abandoned a tightening bias in favor of a neutral outlook. A recent slew of disappointing Australian data and a drop in global yields are also bolstering the case for a rate cut.

Overnight-index swaps are pricing in about 60 percent chance of a rate cut by the end of this year as of 9:29 p.m. in Sydney, up from 28 percent a month ago.

“It shouldn’t take too much further weakness in the data to see the bank shift to a formal easing bias,” Sally Auld, a strategist at JPMorgan Chase & Co., wrote in a note Thursday, referring to the RBA. “Easing could come more quickly than the market expects.”

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