Australian Bonds Rally on RBA Rate Cut, Weak Crude

Australian Bonds Rally on RBA Rate Cut, Weak Crude

4 May 2016, 08:18
Roberto Jacobs

Australian Bonds Rally on RBA Rate Cut, Weak Crude

The Australian bonds rallied Wednesday for two consecutive days as investors pour into safe-haven assets after Reserve Bank of Australia lowered its interest rate by 25 bps to historic low of 1.75 pct. Also, tumbling crude oil prices drove investors towards safe-haven assets. The yield on the benchmark 10-year Treasury note which moves inversely to its price, fell 1.54 pct to 2.426 pct and the yield on the 2-year Treasury bond ticked down 1.54 pct to 1.727 pct by 0515 GMT.

Yesterday, the Reserve Bank of Australia (RBA) lowered its policy rate by 25 bps to record low of 1.75 pct in its May monetary policy meeting held today, against expectations of no change in policy as very low inflation looks to be the primary driver of the rate cut. The RBA Governor Glenn Stevens was more dovish as compared to its last month policy statement and the RBA dropped language that inflation is close to target, suggesting there are rooms for further rate cuts if necessary. The Governor said that the commodity prices firmed noticeably from recent lows and economy continuing to rebalance after mining investment boom. He further said that judged prospects for growth would be improved by easing at this meeting and they will take a closer look and carefully monitor housing market, but present risk of lower rates in housing sector less than a year ago.

The Central Bank Governor retreated that monetary policy has been accommodative for some time and appreciating AUD could complicate economic adjustment. Furthermore he said, indications are that Australian growth is continuing in 2016 probably at more moderate pace and inflation data were unexpectedly low. Recent actions by Chinese policymakers supporting near-term growth outlook and uncertainty about global economic outlook and policy settings among major economies continues, he added in its policy monetary policy statement.

We foresee that the RBA to cut rates again by 25bps over next few months and reduce it further to be down to 1.25% by mid-2017.

“The RBA's 25 bps cut in its cash rate to 1.75 pct on Tuesday signals low inflation to global markets, pushing both bond yields sharply lower around the world,” said ANZ economists in a note.

"With yields going out on their lows, the market may take things a little further this morning, but will be watching out for the AOFM's (Australian Office of Financial Management) borrowing program," the ANZ economists added.

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, crude oil prices tumbled on concerns that slowing demand and rising Middle East production would extend a global supply overhang. The United States crude inventories rose by 1.3 million barrels in the week to April 29 to 539.7 million barrels, according to data from the American Petroleum Institute, which further weakened the investor sentiments. Also, Iraq said that its oil shipments from southern fields averaged 3.364 million barrels per day in April, up from 3.286 million in March and production from top exporter Saudi Arabia was 10.15 million barrels per day in April. The International benchmark Brent futures fell to $44.97, from yesterdays $45.56 and West Texas Intermediate (WTI) declined to $ 43.72, against yesterdays $44.40.

Today, Australia April services PMI (AiG Performance of Services Index) rose to 49.7 from 49.5 in March and Australia April new vehicle sales rose 7.2% y/y, the fourth consecutive month of gains. Meanwhile, Australia's S&P/ASX 200 fell 0.42 pct to 5,265.5 by 0520 GMT.

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