Australian bonds gain on weak economic data, RBA easing likely

The Australian 10-year bond gained on Monday on weak economic data, increasing further scope for RBA monetary easing. The benchmark 10-year bonds yield, which is inversely propositional to bond price dipped 6 bps to 2.471 pct and 3-year bonds yield fell 8 bps to 1.87 pct at 5:40 GMT, while it is expected to trade in the range of 1.866 - 1.966 pct.

The monthly inflation gauge for March stood flat at 0.0% m/m, from prior -0.2% in February  and it rose 1.7% y/y as compared to +2.1% in previous session. Similarly, February retail Sales also stood flat at 0.0% m/m (consensus was for +0.4%), from up 0.3% in January.

The Reserve Bank of Australia is set to release its third policy statement for 2016 on Tuesday, 5th April and is expected to leave the official cash rate at its record low of 2.00%, where it has been since May 2015. The RBA will monitor recent market disturbances, while keeping policy unchanged for the foreseeable future, but will stick with an easing bias.

Moreover, the RBA Governor Stevens in his latest comments said further cuts in interest rates remain on the table, but he must consider the longer-term risks of too low rates, i.e. the danger of excessive leverage. He also said that the real GDP growing at a slower pace and says easy monetary policy and lower AUD helping growth; therefore economy likely to expand at moderate pace. 

We expect the central bank to lower its official cash rate in the future only if core inflation continues to move downward and if the economic growth statistics disappoint. Also, if unemployment and GDP growth fail to improve over the coming months, another cut will probably occur sooner rather than later.