Australian government bonds will outperform U.S. peers in the coming eight months, shrinking the yield premium offered by benchmark notes to the least since 2006, as growth prospects for the two nations diverge.
Australia’s 10-year yield will be little changed at 3.71 percent by March 31, while the rate for similar-maturity U.S. Treasuries will rise 20 basis points to 2.78 percent, according to the average forecasts of analysts surveyed by Bloomberg News. That would shrink the difference to 93 basis points, which would be least since November 2006.
Traders are predicting Reserve Bank Governor Glenn Stevens will cut benchmark rates over the next year by the most among developed economies in a bid to boost domestic demand and compensate for a decline in mining investment as China’s growth sags. Australian government bonds are set to rebound from their worst run of losses since 1994 as prospects for lower borrowing costs spurred interest from Pacific Investment Management Co. and BlackRock Inc.
“The tale of the two economies is the U.S. on an upswing versus Australia on a downswing,” said Martin Whetton, an interest-rate strategist at Nomura Holdings Inc. in Sydney. “We continue to see weakness in the domestic economy and therefore, we continue to see rate cuts coming.”
Nomura predicts RBA officials will cut the overnight cash rate target by 25 basis points to 2.5 percent when they gather Aug. 6 to decide on monetary policy. Traders agree, seeing a 94 percent chance for a reduction according to interest-rate swaps data compiled by Bloomberg, after Stevens said today that the central bank retains scope to lower borrowing costs.
“Recent inflation data do not appear to have shifted” the RBA’s assessment that the outlook for prices may “afford some scope to ease policy further if needed to support demand,” he said today in the text of a speech in Sydney. “The recent decline in the exchange rate seems to make sense from a macroeconomic perspective. It would not be a major surprise if a further decline occurred over time.”
Stevens and his board will probably reduce Australia’s borrowing costs by 52 basis points over the next 12 months, the biggest decline seen among 10 developed-nation central banks tracked by Credit Suisse Group AG indexes based on swaps. Similar U.S. swaps are pricing in 15 basis points of tightening, the data show.
Australia’s statistics bureau said this month the jobless rate climbed in June to the highest since September 2009, while a National Australia Bank Ltd. survey showed businesses grew pessimistic in the second quarter. Building approvals unexpectedly declined last month, according to a report today.
Manufacturing in China, the South Pacific nation’s biggest trading partner, probably contracted in July for the first time in 10 months, economists said before a government report due Aug. 1.
Australian government bonds returned 0.5 percent this month to yesterday, according to Bank of America Merrill Lynch index figures. They lost 0.1 percent in the three months to June 30, the third-straight quarterly decline, matching the length of a more severe slump 19 years ago. Treasuries have fallen 0.2 percent since June 30, the data show.
Pimco, which runs the world’s biggest bond fund, said Australia’s debt is attractive because the RBA will need to lower interest rates as mining investment drops.
The average estimate for Australian 10-year yields rose 17 basis points in this month’s survey completed July 17, compared with the June poll. That was slower than the 32 basis-point increase in the actual yield over that period.
The Aussie dropped to 90.82 U.S. cents as of 2:27 p.m. in Sydney and touched 90.66 cents. It declined 12 percent in the past three months, the worst performer among 16 major peers, and reached 89.99 cents on July 12, the weakest since 2010.
Barclays Plc sees the Australian currency dropping to 86 cents by the middle of next year amid a weaker outlook for Australia and improving growth prospects for the U.S., according to Sydney-based chief economist Kieran Davies.
That’s more bearish than the median estimate in a Bloomberg survey of economists for the currency to slide to 88 cents.
Davies is also expecting a rate reduction at next week’s RBA meeting.
“With growth a little weaker and inflation still contained, they seem likely to cut to 2.5 percent next month,” Davies said.
While concern is deepening that Australia’s economy will struggle to rebound as the mining boom peaks, U.S. officials are weighing the prospect that their economy is close to achieving a self-sustaining recovery that might allow them to reduce unprecedented stimulus.
Federal Reserve Chairman Ben S. Bernanke and his board will probably trim monthly purchases of $85 billion of Treasury and mortgage debt in September, according to a Bloomberg survey of economists conducted July 18-22. Investor expectations for a reduction in the U.S. central bank’s bond buying have pushed the 10-year Treasury yield up 83 basis points this year to 2.58 percent. That compares with a 44-basis-point increase in Australia’s benchmark yield.
The U.S. rate touched 2.75 percent on July 8, the most in almost two years. Data on Aug. 2 may show the U.S. jobless rate fell to 7.5 percent, matching the lowest since 2008, according to economists surveyed by Bloomberg.
The RBA in May reiterated its forecast for “below trend” growth of 2.5 percent this year and predicted a 2014 expansion of between 2.5 percent and 3.5 percent.
“The risk is for further monetary policy accommodation in Australia,” said Tony Morriss, the Sydney-based head of interest-rate research at Australia & New Zealand Banking Group Ltd., which sees the nation’s 10-year yield at 3.9 percent by March. ANZ predicts the equivalent rate in the U.S. will be 2.7 percent by then.
“The prospects of the removal of extreme accommodative policy are seeing U.S. yields rising,” Morriss said. “Any move higher in the U.S. is unlikely to be matched here in Australia.”