Yields are becoming a more focused theme when talking about the RBA
"If one assumes the RBA cuts twice, taking the cash rate to 1%, then a move in 3-year yields to 1.25% at some point is not unreasonable", argues Prashant Newnaha, senior rates strategist for TD Securities. Adding that Australia's government bonds may extend gains amid increasing bets that the RBA is posed to lower interest rates.
In case you missed it, 3-year bond yields in Australia fell below the RBA cash rate for the first time since 2016. Historically, the central bank has reduced borrowing costs roughly three to eight months after 3-year yields fell below the cash rate. So, the crossover today could be a precursor of things to come over the next few months.
TD's note goes on to recommend investors to be positioned for lower yields but expects the RBA to remain on hold for the time being. However, they note that "it's looking pretty risky to be running shorts (bonds) ahead of Thursday's jobs data". Their view is that "a soft data print is likely to see bonds rally further as markets raise the odds of a May rate cut to 50%".
As for the impact of lower yields on the aussie, it's typically not good news in the bigger picture as this means that the RBA will be put under more pressure to cut rates. I've been talking about this since last week.
