Australian bonds plunge ahead of RBA policy decision; 10-year yields hit 6-month high

The Australian government bonds plunged Friday as investors expect that the Reserve Bank of Australia in its next week monetary policy meeting will keep the official cash rate (OCR) on hold at a record low of 1.50 percent in the wake of stronger-than-expected third quarter consumer price index.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, rose nearly 5 basis points to 2.388 percent (6-months high), the yield on 15-year note jumped 6-basis points to 2.751 percent and the yield on short-term 2-year climbed 3 basis points to 1.73 percent by 04:40 GMT.

The Reserve Bank of Australia will hold its monetary policy meeting on November 1, Tuesday and it is widely expected to keep its official cash rate (OCR) unchanged at 1.50 percent. Relieved by the strong print of Q3 consumer inflation, stabilizing economic growth and recovering energy prices, we also expect the central bank to hold its interest rate steady in 2016.

We expect the RBA to hold the cash rate at 1.5 percent but retain its easing bias, with the statement following next week’s board meeting likely to be broadly unchanged from the previous month, said ANZ in its research note.

Australia’s third-quarter consumer inflation index (CPI) rose 0.7 percent q/q, beating market expectations of 0.5 percent q/q, from 0.4 percent in the second quarter of 2016. On an annual basis, it climbed 1.3 percent y/y, trended higher than the market consensus of 1.1 percent y/y, up from prior 1 percent (a 17-year low).

According to latest Reuters poll on the Australian economy, forecasts for inflation was at 1.2 percent for 2016, 2.1 percent in 2017 and 2.4 percent in 2018. Similarly, forecasts for GDP was at 2.9 percent for 2016 (also a poll in July showed the same result), 2.8 percent for 2017 and 2.9 percent in 2018.

Meanwhile, the benchmark Australia's S&P/ASX 200 index traded 0.38 percent lower at 5,261.5 by 04:50 GMT.