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(Bloomberg) -- Switzerland’s shock move to scrap its currency cap looks set to drive investors into a dwindling group of havens, cutting Australian bond yields already at record lows.

The South Pacific nation’s benchmark 10-year bond yield fell as low as 2.49 percent on Jan. 16 in Sydney after the Swiss National Bank abandoned efforts to cap the franc before a meeting this week which may see the European Central Bank announce sovereign bond purchases. Commonwealth Bank of Australia’s Philip Brown said further declines are possible, while Australia & New Zealand Banking Group Ltd.’s Martin Whetton predicts the 10-year rate may reach 2 percent.

Australian bonds still offer the highest benchmark yields among the nine nations including Switzerland that carry unblemished AAA scores from all three major rating firms. Swiss yields fell below zero on Jan. 15. Demand for Aussie notes helped spur a rebound in the local currency, potentially undermining a transition from resource-led growth.

“The initial impact is safe-haven buying because markets don’t like uncertainty,” said Damien McColough, an interest- rate strategist at Westpac Banking Corp., the nation’s second- biggest lender. “It’s hard to make any claims of how much higher prices or how much lower yields can go.”

The Aussie dollar bought 82.33 cents as of 5 p.m. on Jan. 16 in Sydney, having climbed from a 5 1/2-year low of 80.33 reached on Jan. 7. The premium offered by the Australian 10-year bond over the equivalent U.S. rate was 84 basis points.

Shrinking Spreads

The moves in Europe are likely to be supportive of flows into the Australian market and could cut the spread over U.S. notes to about half a percentage point, McColough said.

The Australian 10-year rate was at 2.56 percent at the end of last week. The three-year rate was at 2.08 percent, having earlier fallen to a 2 1/2-year low of 2.03 percent. The gap between the two narrowed to 48 basis points, the least on a closing basis since April 2013, from 135 basis points a year earlier.

Japanese 10-year government bond yields reached a record- low 0.225 percent on Jan. 16, while U.S. Treasury rates touched a 20-month low of 1.70 percent on Jan. 15.

Adding Liquidity

“The only thing we are doing right now is adding to our liquidity by increasing holdings in government bonds and cash in places like the U.S. and Australia that still have yields that are least still positive,” said Kumar Palghat, a Sydney-based money manager and founder of Kapstream Capital, which oversees the equivalent of about $7 billion. “You’d think that a small country’s actions wouldn’t have such a large effect on global markets.”

The Swiss central bank roiled markets worldwide with its unexpected decision to abandon the franc’s cap against the euro, knocking down what an official earlier last week reaffirmed as a pillar of policy. The SNB also deepened negative deposit rates and bond markets rallied globally from the U.S. to Germany and Japan.

The ECB, which is battling against deflationary pressures across the euro zone, may announce so-called quantitative easing measures at its meeting on Jan. 22 in Frankfurt, while investors are also concerned that the Jan. 25 Greek election will fuel instability in the common currency area. The Syriza party, which opposes conditions of Greece’s current bailout, is leading in opinion polls.

Europe Concerns

“While the rest of the world is rallying, Australia can keep rallying, and things aren’t looking good in Europe,” CBA’s Brown said by phone from Melbourne on Friday. “If the ECB announces QE and then the Syriza guys win in Greece and you get some poor Australian data at the same time, another 20 or 30 basis points is quite conceivable,” he said, although he said he doubted that yields would stay that low for very long.

Australia reports on inflation for the fourth quarter of last year on Jan. 28 and the Reserve Bank is scheduled to hold its first meeting this year on Feb. 3. Traders on Friday were pricing in 44 basis points of RBA easing over the next 12 months, while eight out of 24 economists surveyed by Bloomberg predict at least one quarter-point cut by the end of 2015.

While ANZ’s Sydney-based strategist Martin Whetton predicted that the attractiveness of Aussie bonds could cut the 10-year yield by half a percentage point, that’s not the kind of level that CBA’s Philip Brown is expecting.

“We are already in many ways below what seems reasonable in Australia,” Brown said. “While the movement is happening it’s hard to predict where the end point is, particularly for the longer parts of the curve where it isn’t as tied to the cash rate.”

--With assistance from Garfield Reynolds in Sydney.

To contact the reporter on this story: Benjamin Purvis in Sydney at bpurvis@bloomberg.net To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net; Katrina Nicholas at knicholas2@bloomberg.net Nicholas Reynolds

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