Australian 10-year bond yield falls to over 1-month low after RBA Governor Lowe turns dovish

Australian government bonds gained sharply across the curve during Asian trading session Wednesday after the Reserve Bank of Australia’s Governor Philip Lowe turned dovish in his speech at the National Press Club of Australia early today, pushing the 10-year yield to 1-month low.

RBA’s Lowe said “there are scenarios where the next move in the cash rate is up and other scenarios where it is down. Over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly balanced.”

Following this, the yield on Australia’s benchmark 10-year note, which moves inversely to its price, fell about 7 basis points to 2.18 percent (lowest since Jan 4), the yield on the long-term 30-year bond also dipped 6 basis points to 2.72 percent and the yield on short-term 2-year slumped over 8 basis points to 1.78 percent by 04:10 GMT.

“This is pretty much a text book definition of neutral. This stance will be reflected in Friday’s Statement of Monetary Policy by the removal of the words to the effect that: the next move in rates is more likely to be up than down, if not for some time,” noted David Plank, Head of Australian Economics at ANZ.

“Following yesterday’s RBA statement, we expected that – in light of its expectation of a falling unemployment rate and rising inflation, albeit gradual for both – the Bank would retain its tightening bias. So much for that. It would seem the risks to the outlook have dominated what is still quite a positive central case.”

ANZ’s Plank added that “even if the recent softness in the data continues, we doubt the RBA will shift to an explicit easing bias as soon as its May update. The unemployment rate will be the key to the RBA’s thinking.”

On Tuesday, the RBA kept the official cash rate unchanged at 1.5 percent, an announcement that was expected by every analyst surveyed by Reuters. The central bank said low rates supporting economy and some signs of slowdown in global trade, partly stemming from trade tensions. It also added Chinese growth has continued to slow, which is a major risk for the Australian economy.

Overnight, the stock market remained upbeat and the U.S. dollar strengthened, ahead of Trump’s State of the Union address later today, while bond yields slipped.

“The U.S. government bond yields fell. The yield on the 10-year U.S. government bond was down 2 basis points to 2.70 percent. The yield on the 2-year US government bond slipped 1 basis point to 2.52 percent,” noted St.George Bank.

Asian markets may see muted trading today as Singapore and other Asian markets will be closed for Chinese New Year holidays this week.

Meanwhile, the S&P/ASX 200 index traded 0.30 percent higher at 5,980.50 by 04:20 GMT, while at 04:00GMT, the FxWirePro's Hourly AUD Strength Index remained highly bearish at -135.59 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex