Australian bonds slump ahead of RBA policy decision, monetary easing seems unlikely

The Australian government bonds slumped Monday ahead of the Reserve Bank of Australia’s (RBA) monetary policy decision. Market hopes that the central bank will hold its fire until it gets another read on inflation in late October.

Also, hawkish comments from the United States Federal Reserve Richmond President Jeffrey Lacker drove-out investors from safe-haven buying.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, rose 5 basis points to 1.958 percent and the yield on short-term 2-year bounced 1-1/2 basis points to 1.505 percent by 05:20 GMT.

The Reserve Bank of Australia is scheduled to release its monetary policy decision on Tuesday at 04:30 GMT and it is widely expected to leave its interest rate unchanged at 1.50 percent. However, we foresee that there is a higher possibility that the central bank will lower its key policy rate in 2016 as further easing seems warranted due to continued subdued consumer inflation.

Moreover, third quarter consumer inflation data will be key in regards to future monetary policy expectations and it is not released until October and therefore although the RBA will likely leave policy unchanged at their September meeting. On the other hand, it is worth noting that if third quarter CPI disappoints, official cash rate cut is unavoidable.

Richmond Fed President Lacker (non-voter in 2016) said that while inflation risks might not be fashionable, he thinks the Fed should pay close attention when its policy benchmarks move away from the current policy rate, noting that given current economic performance it appears that the funds rate should be significantly higher than it is now.

Although we are not anticipating a move to raise rates in September, Lacker partly represents a growing chorus of FOMC members looking to raise rates in the near-future.

Lastly, the trading volumes are expected to be thin as the US and Canadian markets remain closed today on account of Labour Day.

Meanwhile, the benchmark Australia's S&P/ASX 200 index traded 0.63 percent higher to 5,414.5 by 05:20 GMT.