Australian bonds rally on weak crude oil prices, country’s sovereign credit rating at risk

The Australian government bonds rallied Wednesday as crude oil prices fell more than a percent after U.S. stockpiles rose. Also, investors poured into safe-haven instruments on expectations that the country might lose its AAA sovereign credit rating by the end of December 2016.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, fell 2 basis points to 2.81 percent, the yield on 15-year note dipped 4 basis points to 3.25 percent and the yield on short-term 2-year slid 2 basis points to 1.85 percent by 05:00 GMT.

The Australian bonds have been closely following developments in oil markets because of their impact on inflation expectations, which is well below the Reserve Bank of Australia's target. Crude oil prices declined as investors cashed in profits after U.S. inventories rose by 4.68 million barrels last week; the industry-funded American Petroleum Institute was said to report. The International benchmark Brent futures fell 1.26 percent to $55.02 and West Texas Intermediate (WTI) dipped 1.30 percent to $52.29 by 05:00 GMT.

Australia has more than 50 percent chance of losing its AAA sovereign credit rating next week, following the Federal Government's half-yearly economic update, which could see lending costs rise.

On Tuesday, Australia’s business conditions slid for the second straight month in November, dropping back to long-run average levels for the first time since April 2015. It came at 5, lower than the October reading of 7, revised higher from 6. This was largely driven by profitability and trading conditions, as employment conditions were steady at already subdued levels.

Markets will remain focused on the Federal Reserve last monetary policy decision for 2016, which is scheduled to be released on December 14. The Federal Reserve is expected to increase the target range of the key interest rate by 25 basis points to 0.50-0.75 percent, with a unanimous decision. Little change to the statement, though the Committee is likely to acknowledge that market-based measures of inflation compensation have risen further.

Meanwhile, the benchmark Australia's S&P/ASX 200 index traded 0.33 percent higher at 5,540.5 by 05:00 GMT. While at 05:00 GMT, the FxWirePro's Hourly Australian Dollar Strength Index remained slightly bullish +81.24 (higher than +75 represents bullish trend).