SYDNEY, June 24: Australian bond yields screamed to 15-month peaks on Monday amid a rout in global debt markets, while investors sharply scaled back wagers on another cut in domestic interest rates in the face of a declining local dollar.
Heavy selling in very illiquid conditions saw Australian 10-year bond futures tumble 22.5 ticks to 96.00, implying a yield of 4 percent. Since the U.S. Federal Reserve signalled a possible tapering of its asset buying last Wednesday, the contract has shed a huge 57 ticks.
The last time 10-year futures contract fell so far so fast was during the panic of the global financial crisis in October 2008.
The shift has been largely driven by a jump in U.S. Treasury yields, which act as the benchmark for borrowing costs across much of the world. The 10-year yields have climbed 45 basis points in just the past week to reach 2.58 percent.
Australian bonds actually underperformed Treasuries on Monday as investors feared a further sell-off once New York opened and were trying to get ahead of the move.
‘The scale of the drop in our market has been surprising – it seems overdone to us,’ said Andrew Lilley, an interest rate strategist at UBS.
‘The market has also taken a scalpel to expectations of a rate cut. They’ve got less than one easing priced in now,’ he added.
On Monday swap rates were implying just 13 basis points of easing over the next 12 months, compared to more than 30 basis points early last week.
Interbank futures now showed only a 14 percent chance of a cut from the Reserve Bank of Australia (RBA) at its monthly policy meeting on July 2. A couple of weeks ago that probability had been just above 50 percent.
The central bank last cut rates a quarter-point to a record low of 2.75 percent in May, but the market had been confident that at least one more easing was in the cards.
That calculation has changed as the Australian dollar has fallen, from near $1.0400 at the start of May to $0.9210 on Monday. The fall will be a boon to export competitiveness for the country and is essentially a loosening of financial conditions, perhaps lessening the need for an official easing.
Yet the RBA still has an easing bias and nobody sees any risk of a hike in rates for a long time to come, which is keeping short-term yields well anchored.
As a result the spread between 10-year and two-year yields has widened sharply to around 111 basis points, from less than 50 basis points a couple of months ago. A steeper yield curve is typically profitable for banks who tend to borrow short and lend long.
(agencies)
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