Australian bonds hold gains as trade tensions damage market risk sentiments

Australian government bond held gains during early Asian session Thursday as global trade war tensions remained an ongoing theme. Also, bond yields dipped on the unexpectedly weak ADP payrolls report.

Along with that, on Tuesday, the Reserve Bank of Australia (RBA) cut its benchmark interest rate to its historic low by 25 basis points to 1.25 percent, with an aim to assist faster progress in reducing unemployment and achieve more assured progress towards the inflation target.

The yield on Australia’s benchmark 10-year note, which moves inversely to its price, slipped nearly 2 basis point to 1.474 percent, the yield on the long-term 30-year bond also dipped over 2 basis point to 2.132 percent and the yield on short-term 2-year traded plunged about 3 basis points to 1.063 percent by 04:40GMT.

“Weak U.S. jobs data overnight further supported the case for the Fed to lower rates. Share markets rose and bond yields were little changed. The US dollar recovered, pushing AUD back below 70 US cents,” noted St.George Bank.

The U.S. bond yields dipped on the unexpectedly weak ADP payrolls report, but then lifted later on, reflecting the improvement in market sentiment. US 10-year yields ended 1 basis point higher to 2.13 percent, although yields remain well down from a week ago.

A rate cut from the Federal Reserve is fully priced in by September. Moreover, the Australian 10-year bond yields once again dropped below 1.50 percent. Another 25 basis point rate cut from the RBA is priced in by October.

The Australian economy grew at a slow rate in the early part of this year, after a particularly weak second half of 2018. The weakness in the consumer sector and the impact of the housing downturn are major factors behind the subdued result.

In the March quarter, gross domestic product (GDP) grew just 0.4 percent. Annual growth stepped down from 2.4-1.8 percent, the weakest annual rate in 9-1/2 years, St.George Bank added.

“We continue to expect another two rate cuts from the RBA this year, taking the cash rate to 0.75 percent before the end of this year. Our preferred timing is August and November, but a rate cut as soon as July cannot be ruled out. The timing will depend significantly on jobs data,” St.George Bank added.

Meanwhile, the S&P/ASX 200 index rose 0.20 percent to 6,394.5 by 04:40GMT, while at 04:00GMT, the FxWirePro's Hourly AUD Strength Index remained neutral at 67.98 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex