Australian bond rally not over, most bullish analyst says

24/01/2016 19:54 AST

The Australian bond analyst who was the most bullish on sovereign debt three months ago says this year’s rally has further to go as tumbling inflation expectations give the central bank room for interest-rate cuts.

“Bonds are a pretty attractive asset class,” said Stephen Roberts, an economist at Laminar Group Pty, a Melbourne-based fixed-income adviser. “The market’s going to be to-ing and fro- ing with their view about rate cuts over the course of the next few months. Eventually they will ease policy.”

Traders of inflation-linked debt are pricing in a 1.95 per cent increase in living costs for the next 10 years, the lowest level since 2009 when the government revived sales after a six-year hiatus, down from a high of almost 2.5 per cent in June. A report on Wednesday will show core consumer price gains remained at the lower end of the Reserve Bank of Australia’s target range of 2 per cent to 3 per cent in the October-to-December quarter, based on a Bloomberg survey of economists.

Bondholders stand to benefit along with households in a nation Deutsche Bank AG has assessed as the world’s most-expensive country based on the price of goods ranging from iPhones to beer and cars. Tumbling commodities, a depreciating Chinese yuan and the collapse in global equity markets have already forced the Bank of Korea to cut its outlook for consumer prices, while the Bank of Japan is considering reducing its inflation forecasts.



Lower Yields

Australian benchmark 10-year yields will drop to 2.4 per cent by the middle of 2016, Roberts said, from 2.73 per cent as of the end of last week. The Bloomberg AusBond Treasury 0+ Yr Index has gained 0.9 per cent in January, headed for its biggest monthly gain since July.

Inflation expectations are falling globally, with the so- called break-even rate in the US setting a six-year low of 1.29 per cent late on Friday in Sydney.

Nomura Holdings Inc in Sydney said the moves have gone too far.

“BEIs around the world are probably too low, certainly in the US and Australia,” said Andrew Ticehurst, an interest-rate strategist. The figures are “very heavily influenced by low global oil prices and perhaps overly influenced by that,” he said.

Most economists are sticking with predictions that yields will rise. The consensus forecast is still for 10-year yields to climb to 2.91 per cent by March 31, with the most recent projections given the heaviest weightings.



RBA cut

Futures contracts indicate the odds the RBA will cut its main interest rate from a record-low 2 per cent by the middle of 2016 are about 62 per cent.

The BOK this month cut its forecasts for economic growth and inflation as instability from China reverberated in global financial markets. The BOJ is considering reducing its inflation forecasts and postponing the timing for reaching its price target, according to people familiar with the discussions.

The outlook for slowing inflation is leading Toshifumi Sugimoto to load up on long-term Australian bonds, he said.

“I’m bullish,” said Sugimoto, the chief investment officer at Capital Asset Management in Tokyo. “Consumer prices are falling and yields may go down further.”

Bloomberg