Australian Bonds Become One-Way Bet as Traders Price in Rate Cut

For all the recent talk of another rate cut in Australia, bond investors will be more keen to see what the central bank does on its yield-curve control targets.

Overnight swap markets have shifted in recent weeks to price the Reserve Bank of Australia cutting its cash rate to 0.10% from 0.25%. A further cut would be a token move given that the three-month bank bill swap fixing rate — a proxy for bank borrowing — has already fallen below the RBA rate to 0.09%.

Therefore, a rate cut in itself would have little impact on bonds unless the RBA lowers rates on its other policy initiatives.

It leaves short-dated bonds as something of a one-way bet. A cut in RBA’s three-year yield target of 0.25% could drive a meaningful rally. Losses would be capped in case of a rate pause as the central bank would continue to mop up debt if yields breach the target level.

RBA’s term-funding facility rate for banks which stands at 0.25% would also need to be lowered in case of a rate cut to shield lenders from mark-to-market losses. The move could push banks to reach further out the curve for yield.

However, the likelihood of additional supply announcement in the Oct. 6 federal budget is likely to keep sentiment cautious.

Australia’s 10-year yield has dropped over 50 basis points this year as the RBA slashed rates to a record low. Investors will be looking for policy hints in RBA Deputy Governor Guy Debelle’s speech on Tuesday after the nation slipped into its first recession in almost three decades in the last quarter.

Below are the key Asian economic data and events due this week:

Monday New Zealand August Credit Card Spending YoY
Hong Kong August CPI Composite YoY
Tuesday Australia Weekly Payroll Jobs and Wages in Australia (for Sept. 5)
Wednesday Australia CBA Sept. Mfg, Services, Composite PMI
Japan Jibun Bank Sept. Mfg, Services, Composite PMI
New Zealand RBNZ Official Cash Rate
Thailand August Customs Exports YoY
Thailand BoT Benchmark Interest Rate
Singapore August CPI YoY
Taiwan August Industrial Production YoY
Thursday Hong Kong August Exports YoY

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