Australian bonds trade modestly lower ahead of Fed, BoJ policy decisions

The Australian government bonds trade modestly lower Monday during a relatively quiet session that witnessed data of little significance as investors remained focused on the Federal Reserve and Bank of Japan’s monetary policy decision scheduled to be held this week.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, rose 1-1/2 basis points to 2.178 percent, the yield on long-term 15-year note climbed more than 1 basis point to 2.559 percent and the yield on short-term 2-year jumped 4 basis points to 1.623 percent at 03:30 GMT.

The Bank of Japan will hold its two-day monetary policy meeting on 20-21 September, announcing its decision on Wednesday, 21 September is a close call. But, we foresee that the BoJ's 9-member policy board is likely to cut rates on excess reserves and expand its monetary base as stagnant growth and continued risk of deflation will weigh on BoJ Governor Kuroda’s decision.

According to recent Reuters poll, 60 percent of economists see the Bank of Japan easing in September 21; 40 percent see them stay unchanged. Pollsters are split on possible policy action and over 50 percent said the BoJ will adopt more flexible wording on inflation targeting.

Various articles published yesterday pointed to the higher probability that the Japanese central bank will lower its key policy rate by about 10-20 basis points. According to Nikkei daily paper and Reuters, the BoJ will cut its interest rate deeper into negative territory.

Although other news articles, including another one from Bloomberg, affirms that there are a variety of different opinions on the board and Governor Haruhiko Kuroda and his delegates reportedly prefer a rate move to expanding quantitative easing, which is thought to be reaching its limit. Therefore, this backs our expectation that the marginal deposit rate will be trimmed next Wednesday.

Moreover, the United States Federal Reserve in its meeting scheduled on September 20-21 and it is widely expected to leave its interest rates on hold, despite concerns that the strength of the world’s largest economy warrants a rise in borrowing costs. The September FOMC statement as a potential rude awakening for markets who have come to interpret 'data dependence' to mean everything has to be perfect for the FOMC to act.

Given the continued support from labour markets and gradual improvement in pricing measures, coupled with a closing window ahead of the November elections, September sets itself up as quite possibly the best time to act (particularly given that supportive data is not something that can be a guarantee come the December meeting).

 “Rates markets finished quietly on Friday and should open steady in Australia today ahead of a significant week for central bank meetings. The risk remains for yields to climb,” said ANZ in a research note.

Lastly, investors will remain keen to focus on the RBA August meeting minutes, which is scheduled to be released on September 20.

Meanwhile, the benchmark Australia's S&P/ASX 200 index traded 0.06 percent higher to 5,279.5 by 03:30 GMT.