Australian bond yields recover slightly on profit booking

The Australian government bonds slumped on Monday as investors cashed in profit after sovereign bonds climbed to its record levels after the United Kingdom voted to end 43 years of European Union membership after a bitterly divisive referendum campaign that ended dramatically Friday.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price rose more than 7 basis points to 2.050 percent and the yield on short-term 2-year note jumped nearly 5-1/2 basis points to 1.589 percent by 05:20 GMT.

On Friday, just over 72 percent of the UK population, the highest participation rate in a country-wide poll since 1992 have participated in a historic referendum to abandon the EU project for good, highly legitimising the 51.9 percent vs 48.1 percent in favour of leaving, result. This outcome flies in the face of the high implied probabilities, based on bookie’s betting odds, of staying in, is at odds with several of the final (pre-referendum) opinion poll findings, and indeed goes against the grain of the number of self-confessed EU-sceptics who are said to have reluctantly moved towards the ‘Stay’ camp.

But the decision has been taken. Although the physical departure from the EU will not occur for at least a few years -  article 50 of the Lisbon Treaty must first be invoked - domestically, the UK faces a very uncertain l-t economic future, and a sea-change in the political landscape. PM Cameron is to step down within three months and is likely to take along with him, Chancellor Osborne. The face of the next Conservative ‘administration’ that will be responsible for negotiating the country’s divorce and orderly exit terms from the EU will be altered, as the centre of gravity of the Tory government moves decisively further to the right. The UK’s relationship with soon-to-be ex-EU partners will be significantly altered. Beyond that, in view of Scotland’s 62 percent vote in favour of remaining in the EU, the SNP will offer another referendum on independence to Scotland, on the basis of Scotland having been yanked out of the EU against the will of its people. The next time around the Scottish people will likely vote in favour of secession.

Apart from this, 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 prices held weaker in Asia on Monday as investors continued to show caution on the back of an unexpected outcome of a referendum last week that sets the stage for Britain to leave the European Union. The International benchmark Brent futures fell 0.18 percent to $48.95 and West Texas Intermediate (WTI) dipped 0.50 percent to $47.40 by 05:20 GMT.

Markets will remain keen to focus on the central bank commentary and particularly at what will come out of the European Central Bank conference this week.

Meanwhile, the benchmark Australia's S&P/ASX 200 index was trading up 0.20 percent, or 10 points, at 5,087.5 by 05:20 GMT.