Australian bonds rise modestly on RBA’s rate cut speculations

The Australian government bonds traded modestly firmer on Wednesday as investors speculate that the Reserve Bank of Australia will lower its official cash rate from prevailing record low in August's monetary policy meeting.

Also, the investors are pricing a 25 basis points rate cut from the central bank to around 60 percent probability after reading dovish July meeting minutes.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, fell 1 basis point to 1.935 percent and the yield on short-term 2-year note also dipped 2 basis points to 1.571 percent by 05:10 GMT.

On Tuesday, the RBA in its July meeting minutes (when rates were left unchanged) mentioned that the officials are waiting for further information on upcoming economic data and updated economic outlook before deciding on policy decision in August.

The central bank reiterated that rising AUD would complicate economic re-balancing and suggested Australian economy grew at a moderate pace in the second quarter of 2016. They further added that inflation is expected to remain quite low for some time given subdued wages, cost pressures and the measures of inflation expectations remained below average.

The liaison suggested retail sales picked up in June, but price discounting is still continuing and the recent labour data remained mixed, leading indicators still pointed to jobs growth. Liaison also pointed to growth in non-mining business investment. Lastly, the RBA judged uncertainty caused by Brexit to have only a modest impact on global growth.

Moreover, Australia’s June Westpac leading index fell 0.22 percent m/m, as compared to 0.21 percent in May. The six-month annualised growth rate in the Westpac-Melbourne Institute Leading Index, which indicates the likely pace of economic activity relative to trend three to nine months into the future, improved from -0.37 percent in May to -0.14 percent in June. While the growth rate of the Index remains below zero, it has improved significantly since the start of the year.

Lastly, investors will remain keen to focus on the Q2 CPI data, which is scheduled to take place on July 27 at 01:30 GMT. Meanwhile, the benchmark Australia's S&P/ASX 200 index was trading up 0.48 percent, or 26 points, at 5,436.5 by 05:20 GMT.