Australian 10-year bond yield hits lowest in 1-1/2 months as global risk appetite wanes

Australian government bonds continue to rally on Tuesday as a risk-off tone dominated across financial markets amid political uncertainty in Italy and falling oil prices.

The yield on Australia’s benchmark 10-year Note, which moves inversely to its price, fell 3-1/2 basis points to 2.720 percent, the yield on the long-term 30-year Note also dipped 3 basis points to 3.253 percent and the yield on short-term 2-year down 1-1/2 basis points to 1.984 percent by 04:00 GMT.

Risk appetite took a knock amid worries of snap polls in Italy after the anti-establishment 5-Star and League parties abandoned plans to form a government. Investors feared Italy's election campaign could focus on the country's continued membership of European institutions and strengthen the populist parties' hand. Adding to the uncertainty, Spanish Prime Minister Mariano Rajoy will face a vote of confidence in his leadership on Friday, Business Times reported.

In the United States, Treasuries saw recent upward pressure sustained during a relatively quiet session as markets were on long holiday-weekend. The U.S. 10-year Note yield fell 3 basis points to 2.906 percent, lowest since April 20.

In broader terms, bigger changes are in store for the Fed (in some respect) as Fed Chair Powell indicated that forward guidance will take a smaller role in the conduct of monetary policy in the future. Although it could suggest a shift, it is not entirely clear just how grand that will actually be, particularly as that could imply curtailing a number of things (or very few at all).

In terms of geopolitical tensions, US President Trump has suggested communication channels are back up with North Korea following the cancellation of the June summit with Kim Jong un. How significant this development clearly remains to be seen, particularly given how quickly recently established good will crumbled in the face of hostile statements. Markets now look ahead to a greater flow of data in the week ahead, highlighted by the May employment report on Friday.

Geopolitical developments over the weekend, including a meeting between the U.S. and North Korean delegations on Sunday, didn't appear to have a big impact on most markets. The talks on Sunday followed a Saturday meeting between South Korean President Moon Jae-in and North Korean leader Kim Jong Un. That, in turn, came after U.S. President Donald Trump said he canceled a planned meeting with Kim in June last Thursday, although the White House later said it was still making preparations "should the summit take place," CNBC reported.

Meanwhile, the S&P/ASX 200 index traded 0.29 percent higher at 6,022.5 by 04:10 GMT, while at 04:00GMT, the FxWirePro's Hourly AUD Strength Index remained neutral at -23.71 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex

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