Australian bonds slump after policymakers remain optimistic over growth outlook in February minutes

Australian bonds slumped on Tuesday after policymakers showed optimism over economic growth outlook in February minutes, mapping out a steady course for rates at its first meeting of 2018 this month.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, rose 1-1/2 basis points to 2.889 percent, the yield on the long-term 30-year note surged 1 basis point to 3.515 percent and the yield on short-term 2-year up 2 basis points to 2.052 percent by 02:20 GMT.

No surprises in the February meeting minutes. The RBA remains upbeat on the global economy, but focused on seeing further progress in reducing spare capacity the labour market, wage growth and inflation domestically. The RBA forecasts: GDP a little above 3 percent over both 2018 and 2019; unemployment to decline to 5-1/4 percent; core inflation to increase gradually to around 2-1/4 percent  by mid-2020. 

The central bank is also looking for more positive signs in non-mining investment, given the lift in non-residential building approvals and the large pipeline of infrastructure investment in Victoria and NSW. In the labour market, there is ongoing uncertainty over how much spare capacity exists, and how quickly unemployment will fall.

The path of the participation rate is also uncertain, as it is unclear to the RBA how the various forces at work (structural e.g. flexible work/demographics/ageing vs cyclical) will play out. As usual, they noted “an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than forecast”.

Meanwhile, the S&P/ASX 200 index traded 0.22 percent higher at 5,880.5 by 02:20 GMT, while at 02:00GMT, the FxWirePro's Hourly AUD Strength Index remained slightly bearish at -77.27 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex

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