Yields on the three-year bond fell as much as seven basis points to a record low of 0.14%, while the benchmark stock index gained almost 2%. The Reserve Bank of Australia will probably cut policy rates to 0.10% while also moving its bond yield target to the same level when it meets on Oct. 6, Westpac Banking (NYSE:WBK) Corp.’s Evans said in a note.
Evans, who has a reputation for accurately predicting RBA policy shifts, joins other strategists who see a coordinated fiscal and monetary effort next month when the government is expected to announce new stimulus spending. When central bank Deputy Governor Guy Debelle spoke on Tuesday, he pointed out the drawbacks from other policy options including currency intervention, leaving traders to conclude that a rate cut is most likely.
“Expectations are gathering that the RBA will tweak its benchmark interest rate settings lower,” said Tom Nash, strategist at HSBC Holdings Plc (LON:HSBA) in Sydney. “This is significant for ACGBs, and we have been highlighting how short-dated yields have room to drop lower on the basis that such a move would likely include a cut to the three-year bond yield target.”
The RBA’s current cash rate and bond yield target are at 0.25%. Other than Westpac, Goldman Sachs Group Inc (NYSE:GS). and National Australia Bank (OTC:NABZY) Ltd. have also forecast more easing measures. Local newspapers have said the government could inject large amounts of money into the economy and provide extra infrastructure spending funds.
Australian stocks are the top performers in Asia, rising the most in three weeks. They’re defying a selloff in other markets, as rising concerns over possible new virus-related restrictions dent risk sentiment.
“The possible announcements of both greater monetary and fiscal stimulus –- when the budget is handed down in the same week -– has put a new coat of paint on the economic outlook,” IG Markets analyst Kyle Rodda said. “That’s why we’re seeing consumer stocks and the financials underpin today’s rally.”
Evans’ call comes as Australia prepares to sell a 2026 bond. The nation has already broken records three times this year as it seeks to fund a raft of stimulus measures.
Andrew Ticehurst, a strategist at Nomura Holdings (NYSE:NMR) Inc. who has been calling for further RBA easing since September 11, sees the three-year yield breaking new lows next month. “We think the decline in three year yields is fair, we expect these yields to be as low as 0.10% on 6 October,” he said.
©2020 Bloomberg L.P.
