Australian bonds gain as private capital spending drag on growth

The Australian bonds gained on Thursday after data showed weaker than expected private capital expenditure figure, which inserted pressure on the pace of economic growth in the first quarter. On the other hand, investors shrug off hawkish comments from Federal Reserve President and firm crude oil prices by shifting their interest towards safe-haven assets. The yield on the benchmark 10-year Treasury note which moves inversely to its price fell 3bps to 2.284 percent and the yield on the short-term 2-year bonds dipped 2bps to 1.647 percent by 0500 GMT.

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.

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 crossed to $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 rose 0.70 pct to $50.09 and West Texas Intermediate (WTI) jumped 0.69 pct to $49.90 by 0500 GMT.

Meanwhile, the benchmark Australia's S&P/ASX 200 index was trading down 0.14 pct, or 7.5 points, at 5,392.5 by 0500 GMT.