Australian bonds plunge as concerns simmer over escalation of trade war

Australian government bonds plunged on Thursday as concerns simmered about an escalation of a trade war between the U.S. and China. Also, U.S. Treasury prices fell after Federal Reserve Chairman Jerome Powell reasserted the need for gradual rate increases, citing a tight labor market.

The yield on Australia’s benchmark 10-year Note, which moves inversely to its price, rose 4 basis points to 2.690 percent, the yield on the long-term 30-year Note climbed 2 basis points to 3.188 percent and the yield on short-term 2-year up 2-1/2 basis points to 2.075 percent by 03:30 GMT.

Bonds market witnessed a heavy sell-off as investors are looking calmer after a tumultuous start to the week triggered by a ratcheting up of trade fear by US President Donald Trump.

In the United States, Treasuries stemmed recent gains alongside mixed equity market performance, as markets took a momentary pause from concerns regarding escalating trade tensions between the US and China (and the rest of the world). As markets cling to hope that nasty rhetoric will begin to fade into the background, though periodically ramped up when it suits administration officials, all anyone is looking for is a way forward that lacks obvious concerns related to tariffs (and their broader effects).

We expect this will begin to weigh greatly on sentiment measures (particularly business sentiment), as has already begun to report from several regional Fed surveys. Something is bound to give at some point, though we expect no change in attitude will be seen until concern makes its way into hiring intentions (or worse yet a pullback in manufacturing employment). 

Fed Chair Powell said that with unemployment low and expected to decline further, inflation close to our objective, and the risks to the outlook roughly balanced, the case for continued gradual increases in the federal funds rate is strong.

Meanwhile, the S&P/ASX 200 index traded 0.72 percent higher at 6,180.5 by 03:30 GMT, while at 02:50GMT, the FxWirePro's Hourly AUD Strength Index remained slightly bearish at -80.21 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex

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