For anyone who thought this month’s surprise interest-rate cut in Australia would deliver gains for the nation’s bond market, you thought wrong.

Government debt in Australia has fallen 0.2 percent in February, even including reinvested interest payments, headed for the first loss in five months, according to data compiled by Bloomberg. The selloff contrasts with swaps traders betting the Reserve Bank of Australia will lower its benchmark at least once more in the coming six months, with a better than even chance of a reduction on March 3.

For all the concern that a slowdown in China will hurt Australia’s economy, what matters to many bond investors is Treasury yields. Aussie and US 10-year government securities, the so-called long end of the market, have a correlation of 0.97 this year. A figure of 1 means they move in lock step. Bonds will fall in both countries in 2015, based on Bloomberg surveys of economists.

“Even though it’s likely the Reserve Bank may cut once more, that doesn’t mean that the long end will continue to rally,” said Susan Buckley, Brisbane-based managing director for global liquid strategies at QIC Limited, which has the equivalent of about $55 billion in assets. “There is the risk of higher yields through the course of this year, led by the US,” she said in a telephone interview on Feb. 20.

Australian 10-year bonds yielded 2.57 percent Friday in Sydney. The figure has climbed from the record low of 2.248 percent on Feb. 3, the same day the RBA surprised the majority of economists and lowered its benchmark a quarter point to an unprecedented 2.25 percent.

More cuts?

With joblessness at a 12-year high, the prices of the nation’s commodity exports tumbling as Chinese demand slows and confidence languishing, swaps suggest Reserve Bank governor Glenn Stevens isn’t finished.

Traders are pricing in about a 60 percent chance the overnight cash rate will be 1.75 percent or less in August, data compiled by Bloomberg show.

The outlook for further cuts should give comfort to bond investors, according to James Alexander, the head of fixed income at Nikko Asset Management Australia in Sydney. The company has the equivalent of $18.7 billion in assets.

“Now you can probably see further scope for falls in bond yields, you can be a little bit more comfortable owning bonds” he said in an interview on Feb. 18. “While that speculation is there about a 2 percent cash rate I think 2.25 percent is an achievable target in Aussie 10-year yields.”

Economists bearish

Economists predict the bond selloff has further to go. Australia’s 10-year yield will rise about 30 basis points to 2.86 percent by year-end, based on Bloomberg surveys, with the most recent forecasts given the heaviest weighting.

Blame it on US Treasuries, the benchmark for government and company borrowing costs around the world. The 10-year yield surged to 2.11 percent at the end of last week from its January low of 1.64 percent. It will climb about 50 basis points to 2.63 percent this year, according to economists’ responses in a separate survey.

Traders are betting the Federal Reserve will raise interest rates in about seven months, Morgan Stanley data show, after the government earlier this month reported a gain in jobs and wages for January.

The good news for Australia is that February’s 0.3 percent selloff isn’t as bad as the 2.5 percent rout for the Treasury market.

“Ten-year yields to a large degree follow the US,” Su- Lin Ong, the head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney, said in a telephone interview Feb. 20. “Whether they move by as much or more then comes down to domestic considerations. We have Aussie yields backing up, but not to the same amount as the US.”

Bloomberg

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