Bond futures point to July rate cut
Official data this week showed that Australia's annual rate of gross domestic product growth in the March quarter fell below 3 per cent for the first time in over two years.
UBS interest rate strategist Andrew Lilley said traders thought that the falling Australian dollar would mean a cash rate reduction would be unlikely.
"Now we're starting to see a reversal of that expectation follow the GDP data," he said.
"What we've seen over the past two days has been a re-pricing of those expectations around July and August."
On Monday the futures market was pricing in a 15 per cent chance of a cash rate cut in July, and on Friday Mr Lilley said that had increased to about 60 per cent.
"On that basis most bonds have been rallying," he said.
Late on Friday, the June 10-year bond futures contract was trading at 96.745 (implying a yield of 3.255 per cent), up from 96.660 (3.340 per cent) on Thursday. The three-year contract was at 97.530 (2.470 per cent), up from 97.460 (2.540 per cent).
The key indicator of US employment, non-farm payrolls for May, were due out on Friday night.
Market forecasts had originally centred on the number of jobs in the US economy rising by 168,000 in the month. However, that figure might be end up being smaller after a private sector US payrolls report for May was weaker than expected.
Meanwhile, the Australian dollar closed slightly higher after it was taken on a roller-coaster ride over the past 24 hours.
On Thursday afternoon the currency dropped to an almost three-year low of US94.35¢, but in offshore trade on Thursday night it had gained almost US2¢ before backtracking.
Late on Friday, the dollar was trading at US95.23¢.
"Currency markets have not been for the faint of heart this week with large intraday moves becoming the norm," CMC Markets foreign exchange dealer Tim Waterer said.
Frequently Asked Questions about this Article…
Bond futures prices have been rising, which signals markets see a higher chance of an interest rate cut by the Reserve Bank next month. Traders have re-priced expectations for a July cut, with the futures market moving from about a 15% chance earlier in the week to roughly 60% by Friday.
Official data showed annual GDP growth in the March quarter fell below 3% for the first time in over two years. That weaker growth prompted traders to reverse earlier views and increase the likelihood of a cash rate reduction in July and August.
Bond futures rallied (prices rose) and implied yields fell: the June 10‑year futures traded at 96.745, implying a 3.255% yield (up from 96.660 / 3.340% on Thursday), and the three‑year contract was 97.530 (2.470%), up from 97.460 (2.540%).
A falling Australian dollar can make a rate reduction seem less likely because a weaker currency can boost inflation and trade dynamics. UBS strategist Andrew Lilley noted traders had thought the AUD decline would reduce the chance of a cut, but GDP data helped reverse that view.
US non‑farm payrolls for May are a key indicator cited in the article. Market forecasts were for about 168,000 jobs, but a weaker private‑sector payrolls report suggested the headline number could be smaller—data like this can influence global bond markets and rate expectations.
When bond futures rally, prices go up and yields fall. This often reflects market expectations of lower interest rates ahead—such as a possible RBA cash rate cut—and can affect fixed‑income returns, loan rates and interest‑sensitive investments.
The Australian dollar was volatile over 24 hours, dropping to an almost three‑year low of US94.35¢ on Thursday afternoon, then gaining almost US2¢ in offshore trade before backtracking. Late on Friday it was trading around US95.23¢. CMC Markets' Tim Waterer warned currency markets have had large intraday moves this week.
UBS interest rate strategist Andrew Lilley commented that traders re‑priced expectations for July and August rate moves after the GDP data. Tim Waterer, a foreign exchange dealer at CMC Markets, noted that currency markets have been highly volatile with large intraday moves.
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