Australian bonds gain on short covering, likely to fall on recovery in energy prices

The Australian government bonds gained Monday as investors covered last week’s short positions. We foresee that the bond yields will recover from the previous session lows following a recovery in energy prices.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, fell 2-1/2 basis points to 2.70 percent, the yield on 15-year note dipped 3 basis points to 3.11 percent and the yield on short-term 2-year slid 1 basis point to 1.82 percent by 04:30 GMT.

The probability of a December rate hike by the Federal Reserve is close to 100%, rising to 98% from 30% before the presidential election.

Federal Reserve Chair Janet Yellen, in her congressional testimony, strengthened bets that the central bank was on the right path to hike interest rates in December. This was the first direct signal in 2016 after the central bank hiked its interest rate in December last year.

Crude oil prices recovered on rising consensus that the OPEC will find a way to reduce production. The International benchmark Brent futures rose 1.45 percent to $47.54 and West Texas Intermediate (WTI) jumped 1.34 percent to $46.30.

Last week, 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.

Meanwhile, the benchmark Australia's S&P/ASX 200 index traded 0.12 percent lower to 5,3458.5 by 05:10 GMT. While at 05:00 GMT, the FxWirePro's Hourly Australian Dollar Strength Index stood neutral at -46.01 (lower than the range of -75 for bearish trend).