Australian bonds sag on growing optimism for US-China trade deal; 10-year yield jumps over 6bps

Australian government bonds slumped across the curve during early Asian session Monday as investors remained optimistic about progress in the US-China trade talks.

The yield on Australia’s benchmark 10-year note, which moves inversely to its price, rose 6-1/2 basis points to 2.279 percent, the yield on the long-term 30-year bond also jumped 6 basis points to 2.782 percent and the yield on short-term 2-year up 4 basis points to 1.877 percent by 03:50GMT.

Investors will be focused on the US-China trade talks, with any signs of common ground likely to extend the rally in commodity markets that started late last week.

“The combination of a more dovish Fed chair Powell and an upside surprise to the December nonfarm payrolls of 312k lent a more supportive tone to Wall Street on Friday and drove U.S. Treasury bond yields back up. The S&P 500 rebounded 3.43 percent while the 2- and 10-year UST bond yields jumped to 2.49 percent and 2.67 percent respectively and oil prices also rose as global risk appetite improved after a weak start to 2019,” noted OCBC Bank.

“Note the futures market has recently shifted to pricing in the possibility of a Fed rate cut this year, and the next question would be if the balance sheet unwinding process may also be adjusted in light of the recent market and US growth headwinds.”

Elsewhere, China also cut RRR by 1 percent point on Friday evening to release a net RMB800 billion, signifying its ongoing policy support to mitigate the growth slowdown.

“The AUD appreciated as a surprise cut in the RRR in China, together with a demonstration of sensitivity to market concerns from the Fed, drove a short squeeze. With little data out, the AUD will be at the mercy of sentiment,” economists noted at ANZ.

Meanwhile, the S&P/ASX 200 index traded 0.03 percent lower at 5,624.5 by 04:00 GMT, while at 03:00GMT, the FxWirePro's Hourly AUD Strength Index remained slightly bearish at -97.24 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex