Australian 10-year bond yields hit highest since December last year as OPEC agrees to lower production

The Australian 10-year bond yields hit highest since December last year on Thursday after OPEC nations agreed to their first production cut in eight years at Vienna.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, rose 7 basis points to 2.81 percent, the yield on 15-year note climbed 7-1/2 basis points to 3.22 percent and the yield on short-term 2-year inched 3 basis points to 1.87 percent by 04:40 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. Crude oil prices rallied after OPEC agreed to output cuts in OPEC ministerial gathering at Vienna yesterday. The International benchmark Brent futures rose 1 percent to $52.33 and West Texas Intermediate (WTI) jumped 0.79 percent to $49.83 by 04:40 GMT.

The Organization of the Petroleum Exporting Countries (OPEC) has agreed to cut production by roughly 1.2 Mb/d to 32.5, which equates to a 4.5-4.6 percent cut per member country. We believe the outcome is consistent with our view of what OPEC production levels were expected to be in 2017 irrespective of the deal reached yesterday, reported Barclays in its research note.

In other words, the meeting is highly unlikely to substantially affect the oil market balance.  Compared with our assessment of OPEC supply last month, we have adjusted our first-quarter of 2017 production estimate lower by 350 kb/d, which will result in a slightly steeper draw than our balances were forecasting, they added.

Moreover, the Reserve bank of Australia in its November meeting minutes mentioned that the underlying inflation is expected to return to normal levels over time and the Australian economy is seen growing close to potential over the next few quarters, before picking up further.

Further, the minutes repeated that a rising Australian dollar could complicate the economic transition and holding policy rate steady in November meeting was consistent with growth and inflation goals. It further mentioned that a steadier Chinese economy had reduced downside risks to the global growth outlook, while risks to global inflation outlook more balanced than for some time.

Lastly, investors will remain keen to focus on the upcoming retail sales data for October, which is expected to grow 0.3 percent m/m, lower than September’s rate of 0.6 percent m/m.

Meanwhile, the benchmark Australia's S&P/ASX 200 index traded 0.72 percent higher at 5,498.50 by 04:50 GMT. While at 04:00 GMT, the FxWirePro's Hourly Australian Dollar Strength Index stood neutral at -7.82 (lower than -75 represents bearish trend).