Australian bonds slump ahead of RBA policy decision, election uncertainty

The Australian government bonds slumped on Monday as investors awaited the Reserve Bank of Australia monetary policy decision, scheduled to take place on Tuesday. Also, Australia’s bonds fell after a national election at the weekend failed to deliver a conclusive winner.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price rose 2-1/2 basis points to 1.999 percent and the yield on short-term 2-year note also jumped 2-1/2 basis points to 1.601 percent by 05:20 GMT.

The Reserve Bank of Australia is due to release its monetary policy statement on Tues 5 July (at 04:30 GMT), and is expected to leave the official cash rate (OCR) at its record low of 1.75 percent, after having cut it by 25 basis points in May. The shock of Brexit result is likely to be an important part of the policy deliberations and include a more explicit easing bias in its post-meeting statement.

According to a recent Reuters poll, 35 of 37 economists expect the RBA will keep interest rates unchanged, while anticipating another policy easing in the third quarter of 2016. Similarly, All 27 economists surveyed by Bloomberg expected that the Reserve Bank will leave interest rates unchanged.

Moreover, The Australian federal election over the weekend failed to produce a clear winner, with major parities failing to gain an outright majority, raising the prospect of prolonged political uncertainty (still the outcome is is too close to call). To form a majority government a party needs to win 76 seats, each of the major parties has won 67 seats so far and 5 seats have been won by minor parties or independents so far, 11 seats remain in doubt.

Around 80 percent of the vote has been counted. While the result is too close to call it does appear likely that the current ruling coalition (Liberal) will win the majority of the 11 seats still in doubt (probably 8 of the 11) - they need to win at least 9 of the 11 to form a majority government, but if it is less than 9 then they would typically get the first crack at forming a minority government. It does not appear likely that the current opposition party (Labor) can win majority government.

In term of data, Australia May building approvals fell 5.2 ercent m/m (consensus was for -3.5 percent), from 3.0 percent in April. Also, it fell a greater 9.1 percent y/y, against market expectation of -6.4 percent, from 0.7 percent from a year ago period. June Melbourne Institute inflation gauge rose 0.6 percent m/m from -0.2 percent in May, posting the biggest gain since December 2013. Meanwhile, it rose 1.5 percent y/y, from 1.0 percent in the same month a year ago.

In addition, the S&P in a report said they may cut Australian rating if budget gridlock continues and inconclusive election result clouds the fiscal outlook. They further mentioned that an improving budget balance is important to Australia's rating and S&P outlook is based on conservative budget policies. Lower Australian rating if parliament gridlock continues, lower Australian rating if budget gridlock continues, they added.

Meanwhile, the benchmark Australia's S&P/ASX 200 index was trading down 0.35 percent, or 18.5 points, at 5,217.5 by 05:20 GMT.