Australian bonds gain as investors wary ahead of RBA policy decision; 10-year yields fall 7bps in a day

The Australian government bonds gained Friday as investors remained cautious ahead of the Reserve Bank of Australia’s monetary policy meeting, which is scheduled to take place on October 4. Also, tumbling crude oil prices and weak equities encouraged traders to shift to safe-haven assets.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, fell 5 basis points to 1.972 percent, the yield on 15-year note dipped 5-1/2 basis points to 2.314 percent and the yield on short-term 2-year slid nearly 4 basis points to 1.563 percent by 04:40 GMT.

The Reserve Bank of Australia will hold its monetary policy meeting next week on October 4, announcing its decision at 03:30 GMT. We foresee that the central bank will remain concerned about persistently low inflation and rising AUD, but the strong housing market will keep policy on hold.

Additionally, economic growth has held up well, commodity prices have risen, and the drag from the mining investment decline is set to fade may also pause the RBA for further monetary easing. We anticipate that the debt market will remain volatile ahead of the Reserve Bank of Australia (RBA) monetary policy meeting.

"We continue to expect the RBA to keep the cash rate on hold at the record low of 1.5 percent.  The trajectory of the AUD also remains important to the RBA’s deliberations, as well as labour and housing market data," said ANZ in a report to clients.

Moreover, 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. Crude oil prices dropped as investors cashed in profit after relishing 7 percent of continues gain in the past two sessions after OPEC confirmed that the group has struck a deal to lower crude output at its policy meeting in November. The International benchmark Brent futures fell 0.80 percent to $49.41 and West Texas Intermediate (WTI) also tumbled 0.60 percent to $47.54 at 04:50 GMT.

Meanwhile, the benchmark Australia's S&P/ASX 200 index traded 0.03 percent higher to 5,429.5 by 04:40 GMT.