The yields of the three-year bonds fell to its lowest since September 2016 below the Reserve Bank of Australia’s policy rate 0f 1.5% which resulted in speculation of a rate cut due to a slowdown in the Australian economy. Moreover, the retail sales and business confidence data shows slow growth, property market, and global trade has slumped adding to the speculation of rate cuts by the country’s central bank. Many leading bankers like the JP Morgan chase, Westpac Banking Corp, UBS Group are all forecasting a 25 basis point rate cut for 2019.
The three-year yields are considered more susceptible than the other long-term bond yields to the central bank rates. The central bank rates were at 1.49% and have been so since the August 2016. A senior strategist at TD securities, Singapore Prashant Newnaha, said
‘Historically when three-years have traded through, the RBA has usually cut anywhere three to eight months later. While TD expects the central bank to remain on hold, we have recommended investors to be positioned for lower yields’.
Another rate strategist from the Nomura Holdings, Sydney said
‘Investors have become increasingly confident that the RBA will need to lower its cash rate and likely more than once this year. The recent decline in European and the US long-end yields is also contributing to the rally at the long end of the Australian curve’.
Fund managers at the QLC and Ardea Investment Management who buy short-term Australian bonds opine that the RBA will be dovish and reduce the rates to as much as 1.20%.
This year the Australian binds have yielded a return of 2.6% and are among the leading economies in the G10 countries as per data. Even the yield for the 10-year bonds has reduced to 1.94% its biggest drop since September 2016 a drop by four basis points.
Though everyone including the bankers, fund managers and investors are speculating rate cuts, the important people who make the decision the RBA policymakers are meeting on April 2 to decide on it. But some of the policymakers think that the rates should be held at the current rates as there is a growing divergence in the labor market and the Australian economy.
Meanwhile, experts have warned that the RBA could be made to cut the cash rate to 1% in the coming year and may also have to take cues from the US to ease the economy of the global and local challenges continue to impact it.