Rate cut clues strengthen bond prices

Australian bond futures prices were stronger after credit rating agency Standard and Poor’s (S&P) downgraded the credit ratings of major European economies.

On Friday, S&P stripped France of its top-line AAA credit rating. And Italy was set to be downgraded from A to BBB+, as press reports suggested Spain was next in line.

UBS interest rate strategist Matthew Johnson said local factors were also at play on Monday’s bond market.

He said the euro had held up well despite the downgrades. Local media reports that the Commonwealth Bank was to issue a covered bond deal in Australia may have also contributed to a strengthening of bond futures prices, he said.

‘‘The pricing of that bond is significantly cheaper than people were expecting,’’ Mr Johnson said. ‘‘That’s a bond market event because it has the market thinking that the Australian banks will either have to raise interest rates independently … or the RBA (Reserve Bank of Australia) would cut interest rates.

‘‘That gave the market extra reason to rally.

‘‘We’ve moved a long way in a short time, it doesn’t seem it can be entirely justified given the Euro and dollar futures.’’

At the close, the March 10-year bond futures contract was trading at 96.270 (implying a yield of 3.730 per cent), up from 96.095 (3.905 per cent) on Friday.

The March three-year bond futures contract was at 96.890 (3.110 per cent), up from 96.720 (3.280 per cent).

- The Age