Australian bonds rally on RBA easing hopes, Q2 GDP misses expectations

The Australian government bonds rallied Wednesday as investors are pricing in a rate cut by November after examining third-quarter inflation numbers. Also, traders shrugged off solid second quarter GDP result as they remained focused on ultra-low inflation.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, fell 5-1/2 basis points to 1.903 percent and the yield on short-term 2-year dipped 2-1/2 basis points to 1.495 percent at 04:20 GMT.

Australia’s GDP increased 0.5 percent q/q, lower than the market expectation of 0.6 percent rise, from 1.1 percent in the previous quarter. On an annual basis, it climbed 3.3 percent y/y, slightly below expectations of 3.3 percent y/y, as compared to 3.0 percent, revised from 3.1 percent same period a year ago. This is the fastest economic growth registered in last four years.

“We think that the weakness in inflation will keep the Bank’s easing bias intact, although we acknowledge that the renewed strength in housing reduces the probability of acting on the bias,” said ANZ in a research note.

On Tuesday, the Reserve Bank of Australia’s bank board members decided to leave the cash rate unchanged at 1.50 percent, which was widely in line with expectations after having lowered it by 25 basis points in August. We foresee that the central bank is likely to ease further in November after it gets another read on inflation in late October. The RBA second last monetary policy meeting for 2016 is scheduled for November 2.

Moreover, third quarter consumer inflation data will be key in regards to future monetary policy expectations and it is not released until October and therefore although the RBA will likely leave policy unchanged at the upcoming October meeting. On the other hand, it is worth noting that if third quarter CPI disappoints, official cash rate cut is unavoidable.

Meanwhile, the benchmark Australia's S&P/ASX 200 index traded 0.13 percent higher to 5,406.5 by 04:40 GMT.