Bet on a rate rise, Aussie investors advised

SYDNEY - Investors should sell Australian government bonds, betting that the central bank will raise interest rates for the first time in a year to combat inflation, says ANZ Banking Group.

The consumer price index rose 3 per cent in the third quarter from a year earlier, the largest gain since the first quarter of 2003.

A government report on January 25 will probably show that inflation remains near the top of the Reserve Bank of Australia's 2 to 3 per cent target range, boosting speculation that rates will rise.

"Australian yields should move higher over the next month," said Sally Auld, senior interest rate strategist at ANZ in Sydney.

"Fundamentals suggest that yields can only move lower if the market starts to believe that a rate easing is imminent.

"This is an unlikely outcome. At present we favour bearish strategies."

Economists at ANZ, the nation's third-largest lender, forecast that the central bank would raise interest rates by June and say there is a risk that rates may be increased as soon as the first quarter.

However, the bank is out of step with futures traders.

The yield on the December 90-day bank bill interest-rate futures contract is 5.51 per cent, suggesting that most traders are betting there will be no change in borrowing costs this year.

As investors shift their expectations in favour of an interest rate increase, the yield on the benchmark two-year bond will rise by about 25 basis points to 5.4 per cent within a month, Auld said.

Australian consumers expect prices will rise 4.6 per cent in the next 12 months, according to a survey of households from the Melbourne Institute of Applied Economic and Social Research, released last week.

Auld, who previously worked at Commonwealth Bank of Australia and Credit Suisse, said investors could make money by placing bets that bond prices would fall and interest rates would rise.

"The domestic market offers an attractive opportunity at current levels, especially for those investors who believe that there is a risk that the RBA could tighten rates as soon as March this year," she said.

- BLOOMBERG