Aussie bill futures surge, wager on early rate cuts

By Anirban Nag

SYDNEY, Aug 1 (Reuters) - Australian short-term bill futures boasted their biggest daily jump in five years on Friday while the bond yield curve steepened on intense speculation that domestic interest rates could be cut sooner than expected.

The December bill contract YBAc2 surged by 0.200 points, the biggest gain since mid-2003, while September futures YBAc1 climbed 0.130 points.

The rally followed an unsourced report from Daily Telegraph columnist Terry McCrann that the Reserve Bank of Australia (RBA) would use its monthly policy meeting next Tuesday to consider a cut in rates, currently at a 12-year high of 7.25 percent.

McCrann said a cut as soon as next week was unlikely but the central bank would use its post-meeting statement to set out the case for lower interest rates, and then ease in September.

Analysts were far from convinced of the report's veracity, but the market had already been leaning toward an easing following a run of weak economic indicators.

Figures out Thursday, showed retail sales slumped in June, posting the biggest fall in six years, while credit growth slowed to levels not seen in a decade.

After the report was published, markets moved to price in nearly 75 basis points of rate cuts by the RBA in the next 12 months CSRBA1Y=CSAU. As recently as June they had been pricing in at least one more hike.

Indeed, some felt the market had not gone far enough.