Australian bonds rise modestly on weaker risk appetite; boom in exports limit yields fall

The Australian government bonds traded modestly firmer Friday as investors poured into safe-haven instruments amid losses in riskier assets including equities and crude oil. Also, jump in November exports limited fall in bond yields.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, fell 1 basis point to 2.70 percent, the yield on 15-year note dipped 1-1/2 basis points to 3.16 percent and the yield on short-term 2-year slid 1 basis point to 1.86 percent by 05:00 GMT.

The Australian bonds have been closely following developments in oil markets because of their impact on inflation expectations (which are well below the Reserve Bank of Australia's target) and the U.S. debt market. The benchmark 10-year bond yields fell 28 basis points to 2.36 percent in just three weeks.

Crude oil prices declined after a surprisingly large increase in U.S. inventories of gasoline and distillates. The International benchmark Brent futures fell 0.11 percent to $56.81 and West Texas Intermediate (WTI) dipped 0.09 percent to $53.71 by 05:20 GMT.

Australia’s trade balance jumped back in the black in November, logging the first surplus seen since March 2014. Friday's data from the Australian Bureau of Statistics showed a trade surplus of AUD1.24 billion in November, far above forecasts of an AUD 500 million deficit.

Additionally, exports jumped by 8.4 percent, or a whopping AUD 2.3 billion, to top AUD 30 billion for the first time ever. Coal, iron ore and rural exports all enjoyed double-digit gains, while imports were unchanged on the month.

Moreover, minutes of the 13 - 14 December FOMC meeting indicated that most participants judged that a gradual pace of rate increases was likely to be appropriate to promote the committee's objectives of maximum employment and 2 percent inflation (currently expected to be roughly 75 basis points of tightening over the course of 2017).

A gradual pace was also viewed by some participants as likely to be warranted because the proximity of the federal funds rate to the effective lower bound placed constraints on the ability of monetary policy to respond to adverse shocks to the aggregate demand for goods and services.

However, while viewing a gradual approach to policy firming as likely to be appropriate, participants emphasised the need to adjust the policy path as economic conditions evolved. They pointed to a number of risks that, if realised, might call for a different path of policy than they currently expected (highlighting increased uncertainty regarding fiscal and other economic policies). As to be expected policymakers are likely to maintain current views until further details surrounding fiscal policy are revealed.

Meanwhile, the benchmark Australia's S&P/ASX 200 index traded 0.23 percent lower at 5,710.5 by 05:00 GMT. While at 05:00 GMT, the FxWirePro's Hourly Australian Dollar Strength Index stood neutral at +11.22 (higher than +75 represent a bullish trend).