Australian bonds slump following weakness in U.S. Treasuries; RBA’s SoMP in focus

Australian bonds slumped Thursday following weakness in the U.S. Treasuries as investors reduced their existing bond holdings to make room for this week's government and corporate bond supply.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, rose3-1/2 basis points to 2.613 percent, the yield on the long-term 30-year note jumped nearly 3-1/2 basis points to 3.385 percent and the yield on short-term 2-year climbed 1 basis point to 1.820 percent by 02:30 GMT.

U.S. Treasury yields edged higher overnight with the yield curve close to its flattest level in a decade. Demand for new issues has been solid, led by USD23 billion of U.S. benchmark 10-year Treasury notes, the second part of the November quarterly refunding worth $64 billion. A healthy appetite for longer-dated debt underscored traders' preference for them over shorter-dated issues over the past week and a half, as they brace for further rate increases from the Federal Reserve while expecting domestic inflation to hold below the Fed's 2-percent target, Reuters reported.

Uncertainty about whether Republicans in U.S. Congress will pass tax cuts and other changes to the federal tax code have made such "curve-flattener" trades more appealing, they said, as have diminished chances the government will introduce a Treasury bond that matures beyond 30 years. Additionally, markets receive 30-year Bond auctions on Thursday, respectively.

On Tuesday, the RBA maintained its key benchmark rate at a record low of 1.50 percent for the 15th consecutive months at its monetary policy meeting held today, as was widely anticipated by market participants. The decision was broadly judged as being in line with the country's sustainable growth and reaching the central bank's inflation goal over time. Further, policymakers maintained optimism over the country's labor market, which has been the prime focus of board members since the start of 2017.

Looking ahead, we think that an interest rate change through the first half of next year is off the table, as inflation will likely remain below the target zone in 2018 as well as 2019. In any case, markets will focus on the RBA Statement on Monetary Policy scheduled to be released on Friday at 00:30 GMT.

Meanwhile, the S&P/ASX 200 index traded 0.66 percent higher at 6,042.5 by 02:40 GMT, while at 02:00GMT, the FxWirePro's Hourly AUD Strength Index remained slightly bearish at -93.28 (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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