Biggest Yield Jump Seen Extending on RBA Hawks: Australia Credit

The world’s biggest jump in two-year bond yields is seen extending as the Reserve Bank of Australia is emboldened to turn from monetary easing by a strengthening local economy.

The benchmark 2016 yield has risen 19 basis points since Dec. 31 to 2.84 percent today, the most among 21 developed sovereign markets tracked by Bloomberg. It may end 2014 at 3.27 percent, a level not seen in almost two years, according to a Bloomberg survey of economists. Of 38 analysts in a separate poll, 14 see the RBA raising the cash rate from a record-low 2.5 percent by Dec. 31.

Better-than-expected gross domestic product, employment and trade data released this month indicate growth may be picking up enough to weather the end of a boom in mining investment. RBA Governor Glenn Stevens this month reiterated a period of steady borrowing costs was likely, even amid signs of weakening manufacturing in China, Australia’s biggest export market.

“Yields will definitely be higher,” said John Honan, the Sydney-based chief economist at Ausbil Investment Management Ltd., which oversees A$10.2 billion ($9.3 billion). “The Reserve Bank will become more hawkish this year and into 2015. The transition of activity from mining to non-mining is becoming better established and will pan out over the course of the next six to 12 months.”

Honan sees Australia’s two-year yield rising to 3.5 percent by the end of 2014 after touching a one-year high of 2.91 percent on March 13. That on three-year debt will probably climb to 3.65 percent from 3 percent currently, he said.

Yield Advantage

A Bank of America Merrill Lynch gauge of the South Pacific nation’s notes due in one to three years showed yields have climbed 18 basis points this quarter to 2.83 percent as of yesterday. The average for similar-maturity bonds of eight advanced economies, including Australia, was little changed at 0.29 percent.

The extra yield Australian 10-year notes offered over their three-year counterparts narrowed to 1.13 percentage points on March 19, the least in six weeks.

Australia’s GDP climbed 2.8 percent in the fourth quarter from a year earlier, the fastest pace in 12 months, according to a March 5 government report. Data released the following day showed the country recorded a A$1.43 billion trade surplus in January, more than 14 times the amount predicted by economists. Other figures this month showed payrolls increased in February by the most in almost two years, while permits to build or renovate houses and apartments rebounded in January.

Economic Surprises

Citigroup Inc.’s Economic Surprise Index for Australia, which shows whether data beat or fell short of economists’ forecasts, climbed to a nine-month high of 50.60 on March 13.

Minutes of the RBA’s most recent policy meeting published on March 18 showed the board saw more signs the country’s record-low cash target was boosting growth. The median prediction of economists polled by Bloomberg this month was for the cash rate to be unchanged for the rest of this year before climbing to 2.75 percent by the first quarter of 2015.

“The RBA has been changing its policy stance toward a more hawkish one,” said Yusuke Ito, a senior fund manager in Tokyo at Mizuho Asset Management Co., which oversees the equivalent of $39 billion. “Can they maintain that stance? There’s concern about the Chinese economy.” The Australian central bank may cut rates again this year, he said.

Chinese Manufacturing

A preliminary reading yesterday for a Chinese manufacturing gauge by HSBC Holdings Plc and Markit Economics signaled factory output may weaken in March for a fifth-straight month, adding to reports this month that showed an unexpected trade deficit and slower retail sales growth.

Analysts forecast Australian growth will average 2.8 percent this year, before accelerating to 2.9 percent in 2015 and 3.1 percent the following year, according to the median of estimates compiled by Bloomberg. That compares with a predicted 2.7 percent gain this year in gross domestic product for the U.S. and 3 percent advances for 2015 and 2016.

QIC Ltd., a Brisbane-based asset manager which oversaw A$75 billion as of the end of 2013, sees Australia’s GDP climbing 2.7 percent this year and the two-year yield rising to 3.3 percent by Dec. 31.

“The upside risks for the Australian economy include a lower Australian dollar and sharper turnaround in non-mining,” Susan Buckley, head of global fixed-interest at QIC, wrote in an e-mailed response to questions. QIC predicts policy makers will lift the cash rate by around 100 basis points in 2015.

The Australian dollar was at 91.39 U.S. cents as of 1:19 p.m. in Sydney, down 14 percent from last year’s high of $1.0599. The currency’s slide in 2013 helped consumer price gains accelerate to 2.7 percent in the fourth quarter from 12 months earlier, the fastest pace in two years and above the midpoint of the RBA’s 2 percent to 3 percent target for inflation.

“Another strong print would be a challenge for the RBA and increase pressure to hike earlier,” Buckley said.

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