Australian Bond Yields Drop to Record Below 2% on Brexit Concern

  • ‘Part and parcel of the world of low yields’: ANZ’s Whetton
  • Swaps market shows 71% chance RBA will cut rates by year-end

Australia’s 10-year bond yields fell below 2 percent for the first time after the Federal Reserve reduced forecasts for interest-rate increases and cited concern the U.K. may vote to leave the European Union.

The 10-year yield dropped as much as seven basis points to 1.998 percent, a record based on data compiled by Bloomberg going back to 1969. The equivalent U.S. Treasury yield declined to a four-month low of 1.54 percent. Bond yields have been driven down as traders dialed back bets on higher U.S. rates, while pricing in the prospect of additional easing by the Reserve Bank of Australia.

Opinion polls published in the past week have shown a strengthening of support among British voters for the country to pull out of the EU at a referendum on June 23. Volatility in major currencies has surged, while odds of the Fed raising rates this year have dropped below 50 percent, according to data compiled by Bloomberg based on futures.

“It’s obviously historic, but it is part and parcel of the world of low yields we live in,” said Martin Whetton, a Sydney-based interest-rate strategist at Australia & New Zealand Banking Group Ltd. “We’ve been hitting record lows in so many markets and it was just Australia’s turn.”

Below Zero

This week’s rally in bonds has seen Germany joining Japan and Switzerland in having 10-year yields below zero for the first time. While that is good news for governments that are reaping lower borrowing costs and in some cases commanding a fee to hold investors’ money, it’s a sign that even after pouring in record amounts of stimulus, central banks are still struggling in their efforts to boost growth and inflation.

Australia’s real economic growth rate in the first quarter was more robust than most had anticipated and unemployment is contained, but disinflationary pressures and subdued nominal growth mean most analysts predict further central bank easing. There’s a 71 percent chance the Reserve Bank of Australia will lower rates by year-end, data compiled by Bloomberg show.

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