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Stevens Seen Cutting Rate to Record by Swaps: Australia Credit

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Stevens Seen Cutting Rate to Record by Swaps: Australia Credit

Reserve Bank of Australia Governor Glenn Stevens, who cut interest rates by the most in three years yesterday, is poised to reduce benchmark borrowing costs to an all-time low this year, credit markets show.

Yields on all government notes maturing in four years or longer tumbled to records after the RBA lowered the overnight cash-rate target by half a percentage point to 3.75 percent. That’s still at least 2.75 percentage points higher than rates in the Group of Seven. Interest-rate swaps show investors expect at least 75 basis points of cuts by October, with a 20 percent chance the RBA rate will fall to a record 2.75 percent or lower, according to data compiled by Bloomberg.

“The market’s expectations for the cash rate to be around 3 percent look about right,” said Sally Auld, a Sydney-based interest-rate strategist at JPMorgan Chase & Co. “The market has so far been correct in its pricing for rate cuts. There’s a good chance the RBA will be back to lowering rates again.”

Stevens heeded calls from unions, businesses and the government to reduce borrowing costs as housing and export prices dropped. Australian bonds offered the best returns among AAA nations over the past month on expectations the RBA will provide aid to an economy weighed down by slowing Chinese growth and Europe’s debt crisis.

Yesterday’s central bank decision was predicted by Citigroup Inc. and Market Economics Ltd., while the 27 other economists surveyed by Bloomberg News forecast a reduction of 25 basis points, or 0.25 percentage point.

Bond Records

The yield on 10-year bonds touched a record low 3.534 percent yesterday before closing at 3.54 percent in Sydney. The gap to rates on similar-dated U.S. Treasuries shrank to 162 basis points, the least in three years.

Australia’s four-year yield fell to a record 2.889 percent, while the rate on five-year notes declined to 2.937 percent, also a record. The 15-year yield slid to 3.863 percent, the least for any of Australia’s longest-dated notes in Bloomberg data dating back to 1991.

Australian government bonds handed investors a 2.2 percent return in April, the most among 18 nations holding a AAA credit score, according to Bank of America Merrill Lynch index data. U.S. Treasuries were the second-best performers, having gained 1.5 percent.

The average yield on government, corporate, state and supranational bonds reached a record low 4.01 percent last month, according to a Standard & Poor’s index.

Corporate Risk

Elsewhere in Australia’s credit markets, the extra yield investors demand to hold Australian corporate bonds instead of government securities rose 25 basis points in April to 280, the highest since Feb. 2, a Merrill Lynch index shows. The spread widened by the most since November. The gap for U.S. notes expanded 11 to 203, the first increase in five months.

The Markit iTraxx Australia index of credit-default swaps that gauges perceptions of corporate bond risk climbed 7 basis points last month to 155, increasing for a second period, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Australia’s dollar, the world’s fifth-most traded currency, bought $1.0317 as of 5:30 p.m. in Sydney yesterday. The so- called Aussie has climbed 47 percent since the end of 2008, prompting businesses, unions and the government to ask the central bank to cut borrowing costs amid job losses in manufacturing and tourism.

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“The market’s expectations for the cash rate to be around 3 percent look about right,” said Sally Auld, a Sydney-based interest-rate strategist at JPMorgan Chase & Co. “The market has so far been correct in its pricing for rate cuts. There’s a good chance the RBA will be back to lowering rates again.”

The reason such businesses can predict these changes, wouldn't be because they also have some ability to manipulate it.

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The article cherry picks the 47% "climb" of the AUD. If you go back a few months before then in 2008 it was 0.98 - now it is 1.03. That is not much of a climb.

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For that past 20 years the AUD has devalued 5.5% pa on average in real monetary terms. In other words for the spending power of your savings just to maintain parity requires and interest rate of at least 7%. When rates fall to 3% the creditors are receiving back less than they lent.

If there was a time for low rates, maybe around the GFC! How long are they going to keep the zero bound game up for........eternity?

Ultimately negative real rates mean declining surplus capital or such to be borrowed. No point creating a surplus that can be lent when you get back less than it cost you to create!

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so they are signalling we should, bail on the aud, before we wont get anything for it., like ohhh i dunno gold, or usd. or anything that isnt going to drop as hard as the aud, when the rates fall another 50 points and another and another.

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so they are signalling we should, bail on the aud, before we wont get anything for it., like ohhh i dunno gold, or usd. or anything that isnt going to drop as hard as the aud, when the rates fall another 50 points and another and another.

Don't make up your mind too quickly, the world might decide 3% on the AUD beats .010% on the USD! When it comes to beggar thy neighbor we are up against champions.

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