Australian bonds hold gains after RBA opens door to possible policy easing; 10-year yield hovers near 1-month low

Australian government bonds held gains across the curve during Asian trading session Thursday after the Reserve Bank of Australia’s Governor Philip Lowe turned dovish in his speech at the National Press Club of Australia yesterday and opened door to a possible rate cut.

A rhetoric shift by the Australian central bank Governor to a more cautious stance boosted hopes of an interest rate cut, weighing on the bond yields. At the same time, U.S. President Donald Trump’s State of the Union address had a minimal impact on the debt markets overnight, although sentiment was slightly weaker.

The yield on Australia’s benchmark 10-year note, which moves inversely to its price, fell about 4 basis points to 2.14 percent (hovers near 1-month), the yield on the long-term 30-year bond also dipped 2 basis points to 2.71 percent and the yield on short-term 2-year slumped over 1 basis point to 1.77 percent by 04:00 GMT.

“The weaker risk environment saw U.S. yields mildly lower. The U.S. 10-year yields fell 1 basis point to 2.69 percent. The yields in Australia fell yesterday on growing expectations of an RBA rate cut. Markets are now fully pricing in a rate cut in a year’s time,” noted St.George Bank.

According to the St.George Bank morning report, the RBA Governor Lowe indicated the RBA no longer necessarily expects the next move in interest rates to be an increase, saying the risks to the cash rate are “more evenly balanced.” Lowe said “downside risks” in Australia “have increased”, although he still expects the Australian economy to grow “at a reasonable pace”. We have had an on-hold view for the cash rate for 2019 and 2020 for some time. We maintain this view, but think the risks of a rate cut have grown considerably.

Lowe indicated a major uncertainty in the domestic economy remains the consumer. Household income growth is important to the outlook for consumer spending. Falling house prices pose a further risk. Lowe said the adjustment in house prices was “manageable”, although he also said it was very hard to model house prices.

On Tuesday, the RBA kept the official cash rate unchanged at 1.5 percent, an announcement that was expected by every analyst surveyed by Reuters. The central bank said low rates supporting economy and some signs of slowdown in global trade, partly stemming from trade tensions. It also added Chinese growth has continued to slow, which is a major risk for the Australian economy.

Asian markets may see muted trading today as Singapore and other Asian markets will be closed for Chinese New Year holidays this week.

Meanwhile, the S&P/ASX 200 index traded 0.96 percent higher at 6,044.50 by 04:00 GMT, while at 04:00GMT, the FxWirePro's Hourly AUD Strength Index remained highly bearish at -123.52 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex