Australian bonds slump as investors risk sentiment attempt recovery; trade war tensions fear still live

Australian government slumped as investors risk sentiment revived despite rising tensions between the world’s two-biggest economy o fa trade war.

The yield on Australia’s benchmark 10-year Note, which moves inversely to its price, rose 2-1/2 basis points to 2.638 percent, the yield on the long-term 30-year Note climbed 1-1/2 basis points to 3.143 percent and the yield on short-term 2-year up 5-1/2 basis points to 2.045 percent by 03:10 GMT.

Bonds markets witnessed a mild sell-off despite the world’s second-largest economy, China announced at the weekend that it would retaliate against new US tariffs on USD50 billion in Chinese imports that will go into effect within days, taking the world’s two largest economies to the brink of a full-scale trade war.

Also, U.S. President Donald Trump threatened on Monday to impose a 10 percent tariff on $200 billion of Chinese goods, escalating a tit-for-tat trade war with Beijing.

In the United States, Treasuries found sustained support on Tuesday as markets continued to absorb the escalating trade conflict between the US and China, this time with US President Trump threatening to impose another $200bln in tariffs on Chinese imports. How and when this all ends is anyone's guess. However, as both sides appear to be digging in (not to mention retaliatory plans from other nations impacted by steel and aluminum tariffs) it is not entirely clear how consumers and small businesses are going to make it out unscathed. This sentiment of concern was echoed on Monday by Atlanta Fed President Bostic who indicated business optimism in his region is fading amidst concern related to tariffs.

Hence, there stands considerable risk that despite however bold a stance the Trump administration is looking take in fighting in defense of US interests, he clearly risks burning down the house to kill the rats. Regardless of the strength or weakness of incoming data, we expect trade tensions will overshadow everything else for the time being. In terms of data, markets now look ahead to 1Q18 current account and existing home sales data on Wednesday.

Meanwhile, the S&P/ASX 200 index traded 0.20 percent higher at 6,095.5 by 03:15 GMT, while at 03:00GMT, the FxWirePro's Hourly AUD Strength Index remained neutral at -39.46 (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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