Australian bonds flat ahead of CPI data; yields likely to gain on higher inflation prints

The Australian government bonds remained nearly flat on Tuesday as investors were eagerly waiting for the latest second-quarter inflation figures. Also, we anticipate a higher reading of consumer price index (CPI) in the second quarter of 2016 shall bind the Reserve Bank of Australia (RBA) to inject further policy easing in August.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, hovered around 1.92 percent mark and the yield on short-term 2-year note jumped more than 1-1/2 basis points to 1.562 percent by 05:20 GMT.

The Australian Bureau of Statistics is scheduled to release its consumer inflation index (CPI) for the second quarter on Wednesday at 01:30 GMT. The inflation reading is expected to increase 0.7 percent q/q in the second quarter of 2016, as compared to down 0.2 percent in the previous quarter. Similarly, the CPI is expected to increase 1.4 percent y/y, from prior 1.3 percent y/y.

This positive reading will be sufficient for the central bank to hold on rates in August. On the other hand, we also foresee that if the CPI print comes below 0.4 percent q/q, it will increase the central bank’s space for twenty basis points rate cut in the policy meeting scheduled in August.

Meanwhile, the benchmark Australia's S&P/ASX 200 index was also trading flat at 5,484 by 05:20 GMT.