Australian bonds gain as trade war fear returns; 10-year yield hits lowest since December last year

Australian bonds gained on the first trading day Monday as investors moved into safe-haven buying on worries of over further escalation of the U.S-China trade conflicts. Also, failed talk between the U.S. and Canada to revamp their trade agreement supported the bonds.

The yield on Australia’s benchmark 10-year note, which moves inversely to its price, fell 2-1/2 basis points to 2.504 percent, the yield on the long-term 30-year bond also dipped 3 basis points to 3.022 percent and the yield on short-term 1-year slumped 1 basis point to 1.956 percent by 04:20GMT.

Investor sentiment turned more cautious after US-Canada trade talks failed to reach a deal. Emerging markets remained under pressure. Also, the growing fear of a full-fledged trade war between U.S.-China added pessimism in the markets.

“US interest rates were mixed, with government bond yields finishing higher at the long end, but falling at the short end, as US-Canada trade talks disappointed investors. The yield on the 10-year US government bond rose from 2.85 percent to 2.86 percent. The yield on the 2-year US government bond fell from 2.65 percent to 2.63 percent,” noted St.George Bank in its morning report.

On the data front, July retail sales were flat, missing market expectations and reversing a run of solid data in Q2. That was largely due to lower consumer confidence and falling house prices.

Looking ahead, the Reserve bank of Australia (RBA) monetary policy decision on Tuesday will in focus, where the central bank is expected to do nothing new. No one expects the Reserve Bank of Australia (RBA), at its meeting tomorrow, to hike its cash rate target which has been at 1.50 percent since August 2016.

The economists from DBS Bank noted in its latest report that the real estate market, where home prices fell for the 11th consecutive month in August, did not welcome the increase in mortgage rates by one of the big four banks last week. Political risks have also increased after Malcom Turnbull resigned as prime minister a fortnight ago; the odds for an early election before November 2019 cannot be discounted. Together, these two factors have offset the RBA’s upbeat view for the economy in its last quarterly Monetary Policy Statement.

“Not surprisingly, consensus has pushed out the RBA hike from 2019 into 2020. Not good considering that the Fed has, at Jackson Hole, reaffirmed its stance to gradually raise rates on a strong US economy. AUD has been depreciating for the year since March when the Fed Funds Rate first rose above the cash rate. The negative AU-US policy rate differential is likely to deepen with the two Fed hikes we see for this year, one this month and another in December. More importantly, pay attention to the AU 10-year bond yield which is looking to test 2.50 percent. Once it breaks below this psychological resistance level, the bond yield will drag the AUD/USD lower, first towards 0.70 and the later, the 0.68-0.69 low seen in January 2016,” DBS bank added.

Meanwhile, the S&P/ASX 200 index traded 0.43 percent lower at 6,299.5 by 04:30GMT, while at 04:00GMT, the FxWirePro's Hourly AUD Strength Index remained neutral at -56.84 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex