HSBC goes over Bloxo’s head on rate cuts

HSBC is not waiting for its local economist, Paul Bloxham, to catch up:

CGS yields headed towards a new record low

Following a multi-year decline in Australian commonwealth government securities (CGS) yields (Figure 1), investors are getting concerned whether CGS yields have bottomed. We are of the view that the trend of lower yields in Australia has yet to run its full course and 10-year CGS yields are likely to fall to a new record low of 2% by Q3 2016 (i.e., surpassing the historical low of 2.28% in February 2015). This forecast is premised on the change in our outlook on G3 yields (Yanking down the yields, 8 October 2015), including the prospects of further expansion of the ECB’s QE programme and aggressive policy easing in China. 10-year CGS yields are strongly correlated with G3 rates and the beta sensitivity is greater when yields are falling. This should result in the convergence of CGS with G3 yields. This is also likely to fuel offshore demand for CGS, which has remained quite subdued in recent quarters (Figure 2). The prospects of aggressive easing by the People’s Bank of China (PBoC) in the form of 350bp reduction in the reserve requirement ratio (RRR) and 50bp reduction in the lending rate by the end of 2016 also argue for lower rates in Australia (China: The redback’s big bang). Our analysis has found a strong causality between the PBoC’s policy easing moves and short-dated AUD swap rates.

I can guarantee you one thing, the 2 year yield is not going to 1.5% without two more rate cuts, that Bloxo says aren’t coming.

HSBC requires some RBA re-education: