Australian bonds trade mixed ahead of RBA policy decision; market pricing 25bps rate cut

Australian government bonds traded mixed during early Asian session on Monday ahead of the Reserve Bank of Australia monetary policy decision scheduled on June 4, where market is pricing a 25 basis points rate cut.

Ongoing trade war tensions between U.S.-China kept risk aversion heightened. Shares and bond yields declined.

The yield on Australia’s benchmark 10-year note, which moves inversely to its price, rose over 2-1/2 basis points to 1.496 percent, the yield on the long-term 30-year bond climbed over 2 basis points to 2.159 percent and the yield on short-term 2-year down 1/2 basis point to 1.117 percent by 04:10GMT.

“There is not a lot that has not been said about tomorrow’s RBA meeting. A rate cut of 25 basis points seems a lay down misere. The accompanying statement will be closely gleaned for clues about forthcoming monetary-policy decisions,” noted St.George Bank added.

“We think the RBA will need to cut another two times this year, in August and November, taking the cash rate to 0.75%. Some analysts believe the RBA might need to cut deeper than this, but we remain wary of becoming too pessimistic.”

Tension between China and U.S. escalated further with China’s retaliatory measures moving from tariff to non-tariff barriers. China’s Ministry of Commerce announced that it will publish a list of “unreliable entities” to safeguard national security, public interest and the rights and interests of Chinese enterprises, and will take all legal and administrative measures necessary against those listed entities., wrote OCBC.

Safe-haven currencies and assets benefited with US 2-year bond yields dropping to a 2-year low and gold rising to a 2-month high. Tweets from US President Trump on the weekend heightened worries over trade.

“The U.S. 10-year treasury yields fell from 2.18 percent to a low of 2.13 percent, which is the lowest since September 2017, and 2-year yields fell from 2.03 percent to a low of 1.91 percent. Markets repriced Federal fund rate expectations; a cut is fully expected by September and another by December,” St.George Bank added.

“Australian 3-year yields fell from 1.12 percent to 1.10 percent and 10-year yields fell from 1.50 percent to a record low of 1.46 percent. The market’s probability for a rate cut at tomorrow’s RBA meeting remained at 100 percent. A follow-up cut in August is at 90 percent.”

Meanwhile, the S&P/ASX 200 index fell 0.60 percent to 6,341.5 by 04:10GMT, while at 04:00GMT, the FxWirePro's Hourly AUD Strength Index remained slightly bullish at 89.87 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex