High-yield/macroeconomics (fka YIELD)

[Preciouslife1]

Buy Australian 10-Year Bonds as RBA to Slow Cuts, JPMorgan Says.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ai.x774ApGtg&refer=home
By Candice Zachariahs

Dec. 1 (Bloomberg) -- Investors should buy Australian 10- year government bonds and sell three-year notes to benefit as the spread between them narrows when investors pare expectations of aggressive central bank rate cuts, JPMorgan Securities said.

Traders lowered expectations of a 1.25 percentage point cut by the Reserve Bank of Australia at tomorrow’s final meeting for 2008 to a 36 percent chance from 64 percent on Nov. 24, according to a Credit Suisse index based on swaps trading. Governor Glenn Stevens slashed interest rates 2 percentage points since September, the most aggressive round of cuts since 1991, to cushion the economy from the fallout of the global credit crisis.

“The biggest driver of the yield-curve shape is the monetary policy cycle and if you think that the cash rate will reach a trough early in the second quarter, then about now is when you’d probably expect the yield curve to get close to a peak,” said Sally Auld, an interest-rate strategist at JPMorgan Securities Australia Ltd., on Nov. 28.

JPMorgan forecasts the benchmark overnight cash rate will hit a low of 3.5 percent in the second quarter of 2009. Traders are betting on a slump to 3.13 percent in the next 12 months, according to a separate Credit Suisse index.

The yield on the three-year bond was 3.58 percent late last week, while 10-year government debt was at 4.6 percent -- a spread of 102 basis points. The gap was 68 basis points at the end of October. A basis point is 0.01 percentage point.

Investors should build “strategic curve flattening positions” by selling three-year bonds and buying 10 years at a spread of 100 basis points or above, targeting a narrowing to between 75 and 80 points over the next six weeks, said Auld.

To hedge against the risk of the three- and 10-year spread widening on larger-than-expected cuts from the RBA, investors could buy March 2009 bank bill futures, said JPMorgan.

“If the curve steepens further, the bank bill futures will rally further,” Auld said.