Australian bonds gain ahead of Yellen’s speech

The Australian bonds climbed on Friday as investors were cautious ahead of Federal Reserve Chair Janet Yellen speech in an attempt to estimate the Fed's likely next step to raise interest rate. The yield on the benchmark 10-year Treasury note which moves inversely to its price fell 2bps to 2.266 percent by 0500 GMT.

The Australian bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Reserve Bank of Australia's target. Today, crude oil prices fell below $50 mark after investors booked profit, as they considered whether higher prices could unlock more output in an already oversupplied market. Yesterday, crude oil prices crossed $50 mark for first time in seven months after the U.S. government reported a larger-than-expected drop in crude inventories. According to the US DOE, crude inventories decreased 4.2 million barrels, as compared to a build of +1.3 million barrels seen prior for the week ending 20 May. This came alongside an increase seen in gasoline inventories of +2.0 million barrels, from a draw of -2.5 million barrels seen prior and a decrease in distillate inventories of -1.3 million barrels, against a draw of -3.2 million barrels. The International benchmark Brent futures fell 0.75 pct to $49.22 and West Texas Intermediate (WTI) dipped 0.73 pct to $49.12 by 0500 GMT.

Yesterday, Australia’s Q1 headline Capex (Private Capital Expenditure) fell 5.2 percent (a key component of GDP growth), against market expectations of -3.5 percent, from up 1.8% in the last quarter of 2015, revised higher from +0.8 percent. Similarly, building capex was down 7.9 percent, consensus was for -3 percent and further plant/machinery tumbled 0.5 percent, compared to expectation of -2 percent.

“Australia’s private capital expenditure survey for the second quarter probably isn’t weak enough to prompt the RBA to follow May’s rate cut to 1.75 per cent with another reduction in June, but it does support our view that rates will soon be cut to 1.50 per cent and that rates will remain low for a couple of years,” the Capital Economics chief Australian economist Paul Dales said in a note.

Meanwhile, the benchmark Australia's S&P/ASX 200 index was trading up 0.49 pct, or 25.5 points, at 5,423.5 by 0500 GMT.