Bloomberg News

Stevens Seen Cutting Rate to Record by Swaps: Australia Credit

May 01, 2012

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.

Housing, Inflation

Australian house prices declined in the first quarter of this year for a fifth-straight period, the statistics bureau said yesterday. Sales of new homes dropped to the lowest-ever level in March, the Housing Industry Association said in an April 30 statement that urged the RBA to lower its key rate by half a percentage point.

Figures from Australia’s Bureau of Statistics last week showed core consumer prices rose at the slowest pace since the 1990s.

“Interest rates for borrowers have been close to their medium-term averages over recent months, albeit tending to increase a little as lenders passed on the higher costs of funding,” the RBA’s Stevens said in a statement after yesterday’s decision.

Mortgage Rates

Australia’s four biggest banks, which account for more than 80 percent of the nation’s home-loan market, say the cash rate has become less relevant to funding costs that they say are rising, prompting speculation they may not pass a rate cut in full to customers.

“What was surprising is how much they put the 50 basis points down to the need to target borrowing costs,” said Damien McColough, head of fixed-income research at Westpac Banking Corp. (WBC), the country’s second-biggest lender. “The market’s suggested that if they are going to be responding to the lack of full pass-through from banks, then they’re going to have to do more rather than less.”

Westpac economists said they expect 50 basis points of reductions this year, in an e-mailed note.

Commonwealth Bank of Australia and Westpac, the nation’s two largest lenders, are reviewing their rates, spokesmen for the banks said. National Australia Bank Ltd. spokesman Brian Walsh declined to say whether the bank will cut borrowing costs.

Australia & New Zealand Banking Group Ltd. (ANZ), which announces its rate moves on the second Friday of each month, increased its standard variable charges in April for the second time this year. Westpac, Commonwealth and National Australia each raised variable mortgage rates by as much as 10 basis points in February.

Surplus Pledge

Treasurer Wayne Swan praised the RBA’s move and said it reflects the government’s “disciplined” fiscal policy and little inflation. He is set to unveil a budget on May 8 that will seek to end four years of deficits in the 12 months beginning July 1. The goal will require him to withdraw the equivalent of about 2.5 percent of gross domestic product from the economy, the biggest fiscal tightening in at least 40 years.

Swan, Prime Minister Julia Gillard and Finance Minister Penny Wong have all said a return to surplus gives the central bank flexibility to cut interest rates.

Support for Gillard’s Labor party fell to a near-record low in an opinion poll published yesterday in the Australian newspaper, as lawmaker scandals overshadow government plans to deliver the federal budget next week. The government’s control of the legislature’s lower house also became more precarious this week after Peter Slipper’s hiatus from the role of speaker was extended and lawmaker Craig Thomson moved from the Labor benches to become an independent pending the resolution of investigations into their conduct.

China Slowdown

Signs of a slowdown in China, the biggest destination for Australia’s commodities exports, are adding to concern the demand that drove companies including Chevron Corp. (CVX:US) and Royal Dutch Shell Plc (RDSA) to spend $180 billion on exploration and development may be waning.

China’s manufacturing Purchasing Managers’ Index rose to 53.3 last month from 53.1 in March, the nation’s statistics bureau and logistics federation said yesterday. That compares with a 53.6 median forecast in a Bloomberg poll. A preliminary reading on April 23 showed a similar gauge by HSBC Holdings Plc and Markit Economics was at 49.1 last month, compared with 48.3 in March. A number below 50 points to a contraction.

The RBA lowered the benchmark borrowing cost to 3 percent in April 2009, the least since the central bank started setting the cash-rate target in 1990. The lowest level for previous Australian benchmarks, which were daily averages for interest rates, was the 2.89 percent reached in January 1960, according to data compiled by the RBA since June 1959.

“With the fiscal tightening coming next week, lower policy rates and a weaker Australian dollar will remain the key escape valves for the Australian economy, especially as we expect further weakness from China into the second quarter,” Robert Mead, Sydney-based head of portfolio management at Pacific Investment Management Co., which runs the world’s biggest bond fund.

“The RBA acknowledged that Australian economic growth and inflation are lower than expected, and the effective tightening of monetary conditions since December necessitated a larger cut now,” Mead said.

To contact the reporters on this story: Kristine Aquino in Singapore at; Benjamin Purvis in Sydney at

To contact the editor responsible for this story: Rocky Swift at

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