Australian bond yields slide tracking U.S. Treasuries; Oct RBA meeting minutes in focus

The Australian bonds rallied Monday following firmness in U.S. Treasuries owing to lower-than-expected September inflation data. Also, investors moved towards safe-haven assets after the Reserve Bank of Australia (RBA) struck a cautious tone in its Financial Stability Report for the month of October.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, fell 2-1/2 basis points to 2.777 percent, the yield on the 15-year note also slid 2-1/2 basis points to 3.065 percent and the yield on short-term 2-year traded 2 basis points lower at 1.918 percent by 02:20GMT.

The September US CPI report revealed a +0.5% m/m reading, versus the unrevised +0.4% m/m result that occurred in August, below expectations for a +0.6% m/m result. On an annual basis, it rose 2.2% y/y, lower than the market consensus of 2.3% y/y, but it is up from 1.9% y/y seen in August. Meanwhile, core CPI came in +0.1% m/m (+1.7% y/y) in September, versus the unrevised +0.2% m/m (+1.7% y/y) reading seen in August, also just below expectations for a +0.2% m/m increase.

On Friday, the Reserve Bank has revealed deep concerns about the property market, warning interest-only borrowers are vulnerable to “payment shock” and that many households could be forced to dump their homes onto the market.

In a stark admission of the heightened threat to financial stability amid endless increases in household debt and rampant property prices, the RBA will launch “top-down stress tests” of the banking system, which will be carried out on top of the supervision from the Australian Prudential Regulation Authority.

In its twice-yearly Financial Stability Review, the RBA said interest-only borrowers remained more indebted throughout the life of the loan than other borrowers, which made them “more vulnerable to higher interest rates, reduced income, or lowering house prices”.

It also points out that the tightening of lending standards by major banks could lead to riskier lending migrating to the non-bank sector. Overall, Australia’s financial system remains in a strong position and its resilience to shocks has increased over recent years, the central bank said.

Now the markets will focus on the October meeting minutes, scheduled to be released on Tuesday at 00:30 GMT.

Meanwhile, the S&P/ASX 200 index rose 0.49 percent to 5,832.50 by 02:40 GMT, while at 02:00GMT, the FxWirePro's Hourly AUD Strength Index remained slightly bullish at 94.26 (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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