Australian Bonds Continue to Rally After RBA Rate Cut, Despite Firm Economic Data

Australian Bonds Continue to Rally After RBA Rate Cut, Despite Firm Economic Data

5 May 2016, 08:23
Roberto Jacobs

Australian Bonds Continue to Rally After RBA Rate Cut, Despite Firm Economic Data

The Australian government bonds continued to rise Thursday for three 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 on Tuesday. The yield on the benchmark 10-year Treasury note which moves inversely to its price, fell 5 bps to 2.384 pct and the yield on the 2-year Treasury bond ticked down 3 bps to 1.693 pct by 0500 GMT.

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.

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.

“Their yields have continued to drop this week as the demand for bonds grows and Australian government bond yields (implied by futures) continued to edge lower overnight, following declines in government bond yields yesterday," said ANZ economists in a research note.

On the other hand, investors did not react to the firm March retail sales rose 0.4 pct m/m, against market expectation of 0.3 pct prior revised higher to 0.1 pct m/m from flat and March HIA new home sales rose 8.9 pct m/m, from down 5.3 pct in February. Moreover, March trade deficit fell to 2.163 billion, market consensus was for 2.9 billion deficits, as compared to earlier deficit of 3.41 billion in February, exports of goods and services rose 4 pct m/m, while imports grew 1 pct m/m. Meanwhile, Australia's S&P/ASX 200 rose 0.13 pct to 5,242 by 0500 GMT.

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