(Bloomberg) — Franklin Templeton has trimmed its Australian bond holdings as it anticipates shallower interest-rate cuts in the nation compared with market estimates.
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“We’ve gone from being more overweight Australian duration to less overweight,” Andrew Canobi, a Melbourne-based director of fixed income at the firm said, referring to a measure of a portfolio’s sensitivity to changes in interest rates.
Canobi said recent jobs and growth data signal one or two rate cuts by the Reserve Bank of Australia this year. Cooling inflation has allowed the RBA to cut in February, but the progress from here won’t be a “bungee jump lower,” he added.
The Aussie swaps market on the other hand is pricing in a 60% probability of three more rate cuts this year, with a 76% chance of a reduction in May, according to swaps data compiled by Bloomberg. For Canobi, market expectations for a rate cut in May “feels a bit high” as the RBA has said its moves will be data dependent.
The RBA has cautioned on further rate reductions after making its first cut in four years last month, fearing lower borrowing costs could jeopardize its inflation fight. However, market concern over the impact of President Donald Trump’s tariffs as well as heightened US-China trade tensions are spurring some to take on more dovish wagers.
Aussie bonds have stayed rangebound this year, largely tracking moves in Treasuries. Yields on the 10-year bond fell to a year-to-date low of 4.24% earlier this month before getting locked in a narrow trading band.
Canobi sees fair value for Australia’s 10-year bond at around 4.5% versus current level of around 4.41%. The Franklin Australian Absolute Return Bond Fund beat 88% of its peers in the last year.
The firm has bought Australian mortgage backed securities and state government debt, Canobi said. They’ve also built up cash levels as part of a broader de-risking strategy in anticipation of more market volatility going forward, he said.
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