Australian 10-year bond yield hits record low as Sino-U.S. trade tensions escalate; RBA to cut rate soon

Australian government bonds gained across the curve during Asian session Tuesday after the trade war between the United States and China worsened. That escalation is pushing to financial markets to price in an interest rate cut from the Reserve Bank of Australia in August.

The yield on Australia’s benchmark 10-year note, which moves inversely to its price, slumped about 2 basis points to 1.704 percent, the yield on the long-term 30-year bond slipped 1/2 basis points to 2.335 percent and the yield on short-term 2-year also traded 1-1/2 basis points lower at 1.290 percent by 04:20GMT.

With the announcement of China’s retaliation overnight that tariffs on 2,493 U.S. products will be raise to between 5-25 percent from 1 June, the risk-off tone has submerged most financial markets. S&P 500 saw its biggest decline in four months, while the U.S. Treasury bonds rallied with the 10-year yield down to 2.39 percent (lowest since late March), OCBC Treasury Research reported.

At this juncture, the stakes are being raised in the US-China trade war version 2.0, and Asian markets are likely to extend its risk-off tone this morning while watching for the RMB direction.

Risk aversion witnessed yields on U.S. bonds decline. The U.S. 10-year yields slumped 7 basis points to 2.40 percent and the 2-year yields fell 8 basis points to 2.19 percent. A rate cut by the Federal Reserve is now fully priced in for December.

“Financial markets are pricing in easier monetary policy from central banks, as global trade risks and risk-aversion rise. The December fed funds future rallied 6bps overnight and is now pricing in a full 25bps rate cut by the Federal Reserve for the end of the year,” ANZ noted.

Moreover, financial markets are also fully pricing in an interest rate cut from the RBA by August. Further to that, the country’s employment report for the month of April, due by end of this week, shall be eyed for extra direction in the debt market.

Meanwhile, the S&P/ASX 200 index traded 0.12 percent lower at 6,235.5 by 04:30GMT, while at 04:00GMT, the FxWirePro's Hourly AUD Strength Index remained slightly bearish at -85.68 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex