Different Directions from Fed and RBA

Australia’s bond yield advantage to the U.S. has narrowed to an 11-month low as traders see the Reserve Bank of Australia renewing a dovish tone even as the Federal Reserve prepares to tighten policy.

The yield premium Australian 10-year notes offer over U.S. debt of similar maturity shrank to 1.03 percentage points June 27, the least since Aug. 1, from this year’s high of 1.53 in March. Bets the RBA, which meets tomorrow, will reduce interest rates by year-end climbed as high as 28 percent last week from 9 percent on June 13, swaps data compiled by Bloomberg show.

Governor Glenn Stevens is grappling with how much a record-low 2.5 percent cash rate will offset a drop in mining investment and a tighter budget, particularly as the currency provides less assistance to rebalancing economic growth. The nation’s housing boom has cooled, and business and consumer confidence remain subdued as indebted households hunker down.

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