Australian bonds gain amid hopes of Sino-U.S. trade resolution; weak Chinese data support debt-buying

Australian government bonds gained across the curve during Asian session Friday as investors remain cautious ahead of any breakthrough in U.S.-China trade deal. Global equity and bond markets had a mixed performance overnight.

The yield on Australia’s benchmark 10-year note, which moves inversely to its price, fell 2 basis points to 2.458 percent, the yield on the long-term 30-year bond also dipped 2-1/2 basis points to 2.984 percent and the yield on short-term 2-year down 1-1/2 basis points to 1.993 percent by 04:00GMT.

“The U.S. 10-year treasury yield is unchanged at 2.91 percent after dipping to 2.89 percent, while the 2-year yield slipped from 2.77 percent to 2.76 percent. Fed funds rate futures continued to price the chance of a rate hike on December 19 at 80 percent. Beyond that, a March rate hike is at a 30 percent chance,” noted St.George Bank.

On the currency, the Australian dollar traded in a relatively tight range overnight as the market struggled for direction. Today, any signs of further weakness in the Chinese activity or in the global PMI’s could bring renewed downside pressure.

The Fed hikes in December and signals flexibility in the path ahead. A shift lower in the dots will underscore that the ultimate destination next year is unknown. Should the median remain at three hikes in 2019, our strategists expect UST 2s5s and 2s10s curves to flatten further, Morgan Stanley said.

“Revise 2019 growth forecasts and the dots lower. Whether or not the shift is enough to move the median is a close call. Governor Bowman will submit her first dot and we expect it to land on two. But it would take the Chair deciding to lower his dot to take the median all the way down to 2.875 percent. See our table of SEP Changes,” noted Morgan Stanley.

“We continue to look for two hikes in 2019, which will bring the midpoint of the target range to 2.875 percent. Thereafter the FOMC moves into the "third phase" of policymaking, managing policy around neutral.”

Meanwhile, the S&P/ASX 200 index traded 0.44 percent lower at 5,613.5 by 04:10 GMT, while at 03:00GMT, the FxWirePro's Hourly AUD Strength Index remained highly bullish at 175.29 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex