- Australian government 10-year bond yields have fallen to the lowest level on record. Again.
- Yields fell to 1.585% in early trade on Thursday. Six months ago they were trading above 2.8%.
- Geopolitics, a slowdown in the global economy earlier around the turn of the year and widespread expectations for RBA rate cuts have combined to depress Australian bond yields to unprecedented levels.
- HSBC is forecasting Australian 10-year yields will fall to 1.4% by the end of this year.
Australian government 10-year bond yields have fallen to the lowest level on record. Again.
On Thursday, the yield touched 1.585% before rebounding marginally to trade at 1.589%.
One month ago, it sat at 2%. Six months ago, it was trading above 2.8%. In the past, those levels would have been deemed to be ultra-low, but they now look comparatively high.
The latest leg lower mirrored a similar move in US Treasuries on Wednesday, sparked by renewed concerns over trade tensions between the United States and China.
“Treasuries rallied amid an increased sentiment that geopolitical tensions will persist throughout the year,” said analysts at ANZ.
Crude oil prices also tumbled following a surprisingly large build in US crude oil inventories, potentially limiting inflationary pressures in the period ahead, should the recent sell-off be sustained.
While those factors contributed to the decline in Australian bond yields on Thursday, the broader decline over the past month largely reflects growing expectations that the Reserve Bank of Australia (RBA) will cut Australia’s cash rate below 1% by the middle of next year, according to current market pricing.
A recent lift in Australia’s unemployment rate, following an abrupt slowdown in the economy in the second half of last year, will increase the risk that inflationary pressures, already very weak, could become even softer.
With benchmark yields continuing to hit record low after record low, Tom Nash, rates strategist at HSBC, says there’s likely to be even further falls to come.
“The two [RBA] cuts currently priced should be thought of as the minimum that will be delivered,” Nash wrote in a note released on Wednesday.
“The focus should now shift to the proximity of the lower bound of interest rates.”
The lower bound, as Nash describes, is the point where the RBA will be unable to cut Australia’s cash rate any lower in order to stimulate the economy, leading to the possibility of the RBA introducing unconventional policy measures such as quantitative easing.
Given Nash thinks there’s a clear risk the RBA may have to cut the cash rate below 1%, he has revised down his 10-year Australian government bond yield forecast, now expecting it to fall to 1.4% by the end of this year from 1.85% seen previously.
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