Australian bonds trade lower as RBA maintains record low interest rate

The Australian government bonds traded lower Tuesday after the Reserve Bank of Australia in its September monetary policy meeting maintained its official cash rate at a record low of 1.50 percent, widely in line with expectations after having lowered it by 25 basis points in August.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, rose 1 basis point to 1.956 percent and the yield on short-term 2-year bounced 1-1/2 basis points to 1.518 percent at 05:40 GMT.

At its meeting today, the central bank board members decided to leave the cash rate unchanged at 1.50 percent. The RBA Governor Glenn Stevens in its last monetary policy statement reiterated that the global economy is continuing to grow, at a lower than average pace. Several advanced economies have recorded improved conditions over the past year, but conditions have become more difficult for a number of emerging market economies. Actions by Chinese policymakers have been supporting growth, but the underlying pace of China's growth appears to be moderating.

Moreover, commodity prices are above recent lows, but this follows very substantial declines over the past couple of years. Australia's terms of trade remain much lower than they had been in recent years. Financial markets have continued to function effectively. Funding costs for high-quality borrowers remain low and, globally, monetary policy remains remarkably accommodative.

In Australia, recent data suggest that overall growth is continuing, despite a very large decline in business investment, helped by growth in other areas of domestic demand and exports. Labour market indicators continue to be somewhat mixed, but suggest continued expansion in employment in the near term.

In addition, we see nothing much important to take from the statement but the central bank seems to have hinted towards Wednesday's second-quarter gross domestic product (GDP) numbers. According to the latest ANZ in a research note, the preliminary estimate for second quarter GDP is for a rise of 0.3 percent q/q. This result follows a strong 1.1 percent q/q rise in Q1 and would see annual growth tick up to 3.2 percent from 3.1 percent in Q1, broadly matching the RBA’s rounded forecast of 3.25 percent.

Although the quarterly growth rate is a step down from Q1, this largely reflects volatility in resources exports, rather than any trend slowdown in the broader economy. Taken together, growth in the first two-quarters looks to have been a solid 2.8 percent annualised. Moreover, the unemployment rate fell again to 5.7 percent in July, while further eroding the chances of the RBA cutting interest rates over the near-term, they added.

Lastly, we foresee that the CB is likely to ease further in November after it gets another read on inflation in late October. The RBA second last monetary policy meeting for 2016 is scheduled for November 2.

Meanwhile, the benchmark Australia's S&P/ASX 200 index traded 0.08 percent higher to 5,401.5 by 05:50 GMT.