Australian bonds weaken on improved risk appetite

The Australian government bonds plunged Wednesday as investors cooled on safe-haven instruments amid gains in riskier assets including crude oil and equities. Also, rising Bremain support in the latest poll and the RBA's neutral stance on Tuesday June meeting minutes discouraged investors from safe-haven buying.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price rose nearly 6 basis points to 2.170 percent and the yield on short-term 2-year note jumped more than 4 basis points to 1.724 percent by 05:25 GMT.

A new UK poll by Survation for IG group shows 45 percent favour remaining in the EU vs 44 percent for remaining. This slim +1 percent pro-EU balance is down from 3 percent in the organisation's last survey published on Monday.

The implied probability of a 'Remain' vote in Thursday's EU referendum in the UK has softened a shade to 77 percent according to the latest Betfair odds, down from Monday's recent high at 78 percent.

In US Fed Chair Yellen prepared testimony before the Senate Banking Committee, Yellen said since her last semi-annual testimony before Congress, the economy has made further progress toward the Fed's objective of maximum employment. And while inflation has continued to run below our 2 percent objective, the FOMC expects inflation to rise to that level over the medium-term.

However, the pace of improvement in the labour market appears to have slowed more recently, suggesting that our cautious approach to adjusting monetary policy remains appropriate. Yellen added that proceeding cautiously in raising the federal funds rate will allow the Fed to keep monetary support to economic growth in place while the Fed assesses whether growth is returning to a moderate pace, whether the labour market will strengthen further, and whether inflation will continue to make progress toward the Fed's 2% objective.

We see nothing particularly groundbreaking here with Yellen not taking the opportunity to move far away from what was seen in the June FOMC statement. Also, we expect the tone for higher yields to continue today, particularly given the interpretation of the RBA's June minutes.

On Tuesday, the Reserve Bank of Australia in its June monetary policy board meeting minutes mentioned that appreciation of AUD could complicate adjustment of economy to the lower terms of trade and low interest rates and weaker AUD since 2013 have helped support above potential growth in Q1.

The board's decision to leave rates steady at June 7 meeting was consistent with sustainable growth and they added that Q2 growth to be more moderate, but year-ended growth should stay slightly above potential.

The meeting also noted the recent uncertainty about UK referendum on EU membership that has resulted in increased sterling volatility and growth in Australia's major trading partners moderated in Q1, as largely expected.

In addition, the Australian bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Reserve Bank of Australia's target. Today, oil prices rose in early Asian trading on Wednesday, with U.S. crude joining Brent above $50 a barrel after data from the American Petroleum Institute (API) showed a larger than expected draw on stocks. U.S. crude inventories fell by 5.2 million barrels for the week ended June 17, the API said. The trade group's figures were triple the draw of 1.7 million barrels forecast by analysts in a Reuters poll. The International benchmark Brent futures rose 0.55 percent to $50.90 and West Texas Intermediate (WTI) climbed 0.60 percent to $50.15 by 05:25 GMT.

Meanwhile, the benchmark Australia's S&P/ASX 200 index was trading higher 0.07 percent, or 4.5 points, at 5,232.5 by 05:25 GMT.