Australian Bonds Slump on Firm Risk Sentiments
The Australian government bonds slumped Tuesday on tracking overnight rally in crude oil prices and equities market. Also, investors cooled on safe-haven buying after the Reserve Bank of Australia's (RBA) May policy meeting, at which policymakers reduced the cash rate by 25bps to a record low 1.75 pct, were less dovish than some had anticipated. The yield on the benchmark 10-year Treasury note which moves inversely to its price, rose 6bps to 2.299 pct and the yield on the 2-year Treasury bond also climbed 6bps to 1.656 pct by 0530 GMT.
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, the crude oil prices jumped more than 3 pct after long-time bear Goldman Sachs said the market had ended almost 2-years of oversupply following global oil disruptions and flipped to a deficit. Reuters in its recent report said that supply disruptions from Nigeria, Venezuela, the United States and China triggered a U-turn in the oil outlook of Goldman Sachs, which long warned of overflowing storage and another looming crash in prices. Venezuela's oil production has already fallen by at least 188,000 barrel per day (bpd) since the start of the year as PDVSA struggles to make the investment needed to keep output steady. In the United States, crude production has fallen to 8.8 million bpd, 8.4 pct below 2015 peaks as the sector suffers a wave of bankruptcies. And in China, output fell 5.6 pct to 4.04 million bpd in April, compared with the same time last year. Meanwhile, the International benchmark Brent futures rose 0.51 pct to $49.22 and West Texas Intermediate (WTI) jumped 0.98 pct to $48.19 by 0530 GMT.
“Oil prices continued to gain overnight, driven by firming demand and disruption in Canada, Venezuela and Nigeria,” the ANZ economists said in a note.
The Reserve bank of Australia in its May policy meeting minutes mentioned that the members discussed merits of waiting for more information before cutting rates at may 3 meeting and on balance members were persuaded that a rate cut would help inflation return to target over time. Indicated members noted recent data on inflation and labour costs had been lower than expected and recent developments had not led to a material change in economic outlook. Said very accommodative monetary policy helping economy rebalance following mining boom and lower AUD since 2013 assisting economy, but a rising AUD would complicate this. Members noted a recent rally in commodity prices was not expected to boost mining investment and growth outlook for Australia's major trading partners had been revised a little lower since February. Chinese growth had moderated further in Q1, more stimulatory policy should provide support and employment growth had slowed in the first quarter of 2016, although members noted that it had remained stronger than population growth over the past year, they added.
The markets will now focus on April unemployment rate on Thursday (0130 GMT). The Australian stocks were trading firmly in positive territory today following a jump in oil prices and strong overnight leads from Wall Street. The benchmark Australia's S&P/ASX 200 index was trading up 0.47 pct, or 25.40 points, at 5,384.30 by 0400 GMT.