CBA says Australian bonds should maintain their yield premium to US ones throughout 2017

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While US and Australia official interest rates will converge by September, the yield premium Australian bonds offer will remain until March next year, CBA predicts.

The inability of the Trump administration to deliver tax cuts and spending initiatives has underwhelmed. So has growth and inflation, CBA said in a note. Federal investigations into the White House have only added uncertainty.

“Talk of impeachment has reduced US yields,” CBA said. “The pull-back in yields is symptomatic of the lower for longer world in which we live. Our forecast trajectory heads in a similar direction, but we’ve taken a little off the top.”

These two tables from CBA puts the spreads and revision in yield forecasts

The spread Australian bonds offered over their US peers last month compressed to levels not seen in 16 years as monetary policy between the two nation’s diverge.

The US Federal Reserve is expected to raise rates twice this year while the Reserve Bank of Australia is seen on hold for the rest of 2017.

The target US Fed Funds rate is currently 0.75% to 1%. The RBA cash rate stands at a record low of 1.5%.

Australian benchmark 10-year bonds yielded 2.41%, while the US equivalent yield stood at 2.18%.

The yield premium Australian bonds offer is a primary factor in foreign demand for the nation’s bonds and lends supports to the currency as well.

CBA forecasts the US bonds yields to offer as much a 10 basis points over the 10-year Australian paper by December 2018 before slipping to 5 basis points in June 2019.

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