Australian bonds rally after RBA cut policy rate to historic low

The Australian bonds rallied Tuesday as investors pour into safe-haven assets after Reserve Bank of Australia lowered its interest rate by 25 bps to historic low of 1.75 pct. The yield on the benchmark 10-year Treasury note which moves inversely to its price, fell 2.62 pct to 2.445 pct and the yield on the 2-year Treasury bond ticked down 7.37 pct to 1.748 pct by 0545 GMT.

The Reserve Bank of Australia (RBA) lowered its policy rate by 25 bps to record low of 1.75 pct in its May monetary policy meeting held today, against expectations of no change in policy as very low inflation looks to be the primary driver of the rate cut. The RBA Governor Glenn Stevens was more dovish as compared to its last month policy statement and the RBA dropped language that inflation is close to target, suggesting there are rooms for further rate cuts if necessary. The Governor said that the commodity prices firmed noticeably from recent lows and economy continuing to rebalance after mining investment boom. He further said that judged prospects for growth would be improved by easing at this meeting and they will take a closer look and carefully monitor housing market, but present risk of lower rates in housing sector less than a year ago.

The Central Bank Governor retreated that monetary policy has been accommodative for some time and appreciating AUD could complicate economic adjustment. Furthermore he said, indications are that Australian growth is continuing in 2016 probably at more moderate pace and inflation data were unexpectedly low. Recent actions by Chinese policymakers supporting near-term growth outlook and uncertainty about global economic outlook and policy settings among major economies continues, he added in its policy monetary policy statement.

We foresee that the RBA to cut rates again by 25bps over next few months and reduce it further to be down to 1.25% by mid-2017.

Today, Australia’s March building approvals rose 3.7 pct m/m, against expectation of -2.0 pct, from 3.1 pct in February and consumer confidence rose to 113.9 as against 111.7 previously. Meanwhile, Aussie is naturally weak, trading at 0.756, down -1.27 pct so far today and Australia's S&P/ASX 200 rose 1.82 pct to 5,330.5 by 0545 GMT.