This summary was prepared by the Sun Herald on 16 May 2016
Australia’s 10-year government bond yield has hit its lowest point ever, signalling at least one further cash rate cut by the Reserve Bank of Australia (RBA).
The dramatic move down in recent weeks puts Australia closer to developed-market peers that have been grappling for years with falling consumer and producer prices and, in some cases, negative real yields on government securities.
The latest step down followed data from China at the weekend, which points to more pain for Australian commodity producers.
The Aussie dollar, too, is trading around two and half month lows well below US73¢.
Australia’s benchmark 10-year government bond on Monday morning was returning 2.22 per cent, down from around 2.55 per cent just before the RBA cut the cash rate to 1.75 per cent two weeks ago.
Bond yields move down as prices – which are driven by demand – move up. Apart from reflecting investor interest in securing positive returns in a deflationary environment, bond yields act as forecasters of inflationary trends and monetary policy.
The 10-year bond was yielding about 2.7 per cent before the Australian Bureau of Statistics three weeks ago reported first-quarter headline deflation, and a sharp fall in the core measure watched closely by the RBA.
The central bank’s response was swift, and economists and the market expect at least one more cut to the cash rate this year.
Current interest rate swaps market pricing suggests an 80 per cent chance of a cut, to 1.5 per cent, at the August board meeting and a 92 per cent chance of one in September.
The chances of two further reductions, a scenario increasingly backed by economists, are now 60 per cent by the February meeting, the RBA’s first of 2017.
Jamieson Coote Bonds’ executive director Charlie Jamieson expects at least one more cut and possibly two in the current policy cycle.
“It’s no longer just an international story; it’s an international and domestic story,” he said on Monday.
“The genuine lack of any type of wage-price pressure is really becoming quite a concern and probably means that this has some room to run yet,” he said.
The market’s attention will now turn to Tuesday’s release of the minutes of the RBA’s May board meeting, when it cut the cash rate for the first time in a year.
Jamieson and other economists expect the language to clearly signal more cash rate cuts on the horizon.
“I just think they have to acknowledge that we’re falling behind the curve and that the path of least regret is to act now, with 50 points of reduction, although they won’t say 50 in as many words,” he said.
“The danger was that if they didn’t act now, we were potentially looking at 100 basis points of cuts later, and we know [the RBA] is reluctant to use up that much ammunition.”
