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Slide in Aussie bond yield seen as latest sign that RBA will cut rates


AUSTRALIA'S three-year bond yield dropped below the central bank's policy rate for the first time since September 2016, underscoring how growth jitters are fuelling bets for interest rate cuts globally.

Yields on three-year debt - more sensitive than longer maturities to rate moves - dropped as much as five basis points to 1.495 per cent. The Reserve Bank of Australia, which highlighted concerns over consumption growth in its March meeting minutes published on Tuesday, has kept its cash rate target at a record-low 1.50 per cent since August 2016.

Speculation that the RBA will cut rates has intensified as data including retail sales and business confidence have shown the economy is slowing due to a property market slump and global trade frictions. Bonds have rallied globally as central banks from the US to Australia shifted away from plans to only tighten policy amid expectations of cooling economic growth.

"Historically when three-years have traded through, the RBA has usually cut anywhere three to eight months after," said Prashant Newnaha, senior rates strategist at TD Securities in Singapore. While TD expects the central bank to remain on hold, "we have recommended investors be positioned for lower yields", he said.

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RBA policymakers think rates should stay on hold due to a divergence between growth in the labour market and a slowing economy, according to minutes of the March 5 meeting. The labour market is "particularly important" to the policy outlook and there remains considerable uncertainty over consumption, according to the minutes.

Traders are focusing on the latest jobs data report due on Thursday, with the central bank next meeting on April 2. Westpac Banking Corp, JPMorgan Chase & Co, Macquarie Bank and UBS Group all predict two 25 basis-point rate cuts this year.

Australia's bonds have returned 2.6 per cent this year, the best performers among Group of 10 economies, according to data compiled by Bloomberg. Ten-year yields fell as much as five basis points on Tuesday to 1.93 per cent.

Fund manager QIC Ltd has been buying shorter-maturity Australian bonds on wagers that the RBA will stay dovish, while Ardea Investment Management's Tamar Hamlyn sees three-year yields possibly falling as low as 1.20 per cent.

Investors "have become increasingly confident that the RBA will need to lower its cash rate, and likely more than once, this year," said Andrew Ticehurst, a rate strategist at Nomura Holdings Inc in Sydney. "The recent decline in European and US long-end yields is also contributing to the rally at the long end of the Australian curve."

Traders in Japan are also paring back bets that the Bank of Japan would dial back its ultra-loose monetary policy. A 20-year bond auction on Tuesday drew the highest demand in five years, underscoring how Japanese investors are also returning to Japanese government bonds given lower yields elsewhere. BLOOMBERG

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