Australian bonds waver as markets remain muted in the run up to long Christmas holidays

The Australian government bonds were drifting between small gains and losses in quiet Wednesday trading session ahead of long global Christmas holidays. Also, the 10-year bond yields increased nearly 112 basis points (1.12 percent) in just 5 months after touching a record low of 1.82 percent in August this year.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, fell 2-1/2 basis points to 2.85 percent, the yield on 15-year note dipped 2 basis points to 3.32 percent, while the yield on short-term 2-year bounced 2 basis point to 1.97 percent by 04:40 GMT.

On Tuesday, the minutes from the December board meeting demonstrated their range of concerns as well as highlighting the positives within current conditions. The board was rightly concerned about the potential harm to global economic growth if the US were to enact policies that restrict trade.

The board lists this issue as one of uncertainty and one that will unfold over 2017. Trade is not a zero-sum game and misguided policy has the potential to harm living standards in the US as well as in its trading partners.

Despite these areas of softness, the board is still of the belief that inflation will return to the RBA’s target band over time. In our view, the RBA remains overly optimistic regarding economic activity and inflation. If activity and inflation remain below their forecasts ‘over time’ then there is a strong chance the RBA is not done cutting rates in this cycle.

Lastly, trading activity will resume after New Year celebrations, probably from the second week of January, 2017 as market receives no more important data till then.

Meanwhile, the benchmark Australia's S&P/ASX 200 index traded 0.27 percent higher at 5,579.5 by 04:50 GMT. While at 04:00 GMT, the FxWirePro's Hourly Australian Dollar Strength Index remained highly bearish at -122.19 (lower than -75 represents a bearish trend).