Australian bonds slump as RBA left policy rate unchanged

The Australian long-term bonds slumped on Tuesday as the Reserve Bank of Australia maintained its key interest rate at a record low of 2.00%, as expected. The benchmark 10-year bonds yield, which is inversely propositional to bond price rose 0.61 pct to 2.47 pct and 15-year bonds yield jumped 0.22 pct to 2.70 pct at 5:50 GMT.

Governor Stevens reiterated in his statement that that low inflation may provide scope for easier policy and reasonable prospects for economic growth and AUD has appreciated somewhat recently. He said that monetary policy needs to be accommodative in nature and regulations are in place to moderate the risks in the housing market. He further added that the inflation is low and should remain consistent with the target over the next 1-2 years and appreciating AUD could complicate economic adjustment

Looking ahead, we foresee that the central bank could lower its official cash rate further if core inflation continues to trend downward, as the RBA indicated. If unemployment and GDP growth fail to improve over the coming months, such a move will occur sooner rather than later.

Apart from this, Australia February trade deficit rose to 3,410 million (consensus was for -2500 million) from -2937 million in January. Also, exports fell -1% m/m while imports remained flat m/m.

Lastly we foresee that the central bank could lower its official cash rate further if core inflation continues to trend downward, as the RBA indicated, pushing bonds prices up.