Australian bonds rise modestly as RBA’s December meeting minutes remain slightly dovish

The Australian government bonds traded modestly firmer Tuesday on the Reserve bank of Australia’s (RBA) slightly dovish tilt in the December meeting minutes. We foresee that the bond prices will keep drifting between small gains and losses in quiet trading due to a long Christmas holiday.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, fell 1-1/2 basis points to 2.85 percent, the yield on 15-year note dipped 1 basis point to 3.33 percent and the yield on short-term 2-year slid 1/2 basis point to 1.95 percent by 05:30 GMT.

The minutes from the December board meeting demonstrated their range of concerns as well as highlighting the positives within current conditions. The board was rightly concerned about the potential harm to global economic growth if the US were to enact policies that restrict trade. The board lists this issue as one of uncertainty and one that will unfold over 2017. Trade is not a zero-sum game and misguided policy has the potential to harm living standards in the US as well as in its trading partners, reported St George in its daily report.

Despite these areas of softness, the board is still of the belief that inflation will return to the RBA’s target band over time. In our view, the RBA remains overly optimistic regarding economic activity and inflation. If activity and inflation remain below their forecasts ‘over time’ then there is a strong chance the RBA is not done cutting rates in this cycle, they added.

Moreover, 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 ahead of a long Christmas holiday. The International benchmark Brent futures fell 0.20 percent to $54.80 and West Texas Intermediate (WTI) dipped 0.42 percent to $51.90 by 05:30 GMT.

Meanwhile, the benchmark Australia's S&P/ASX 200 index traded 0.65 percent higher at 5,552.5 by 05:30 GMT. While at 05:00 GMT, the FxWirePro's Hourly Australian Dollar Strength Index stood neutral -47.37 (lower than -75 represents a bearish trend).