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Australian short-term bonds gain on lower-than-expected inflation data; 10-year yields hold ground

Australian short-term government bonds gained Wednesday after third-quarter consumer price inflation missed expectations, remaining below the Reserve Bank of Australia’s target band of 2-3 percent. In addition, investors poured into safe-haven assets following weakness in the riskier assets.

The yield on short-term 2-year fell 3 basis points to 1.901 percent, 3-year bond yields also slid 3 basis points to 2.062 percent and 1-year note yield declined 2-1/2 basis points to 1.804. On the other hand, the yield on the benchmark 10-year Treasury note, which moves inversely to its price, remained steady at 2.778 percent, the yield on the long-term 30-year note held steady at 3.538 percent by 02:40GMT.

In the quarter the CPI rose 0.6 percent for an annual pace of 1.8 percent y/y while the average of the core measures rose 0.4 percent q/q (1.9% y/y). The ABS analysis also points to significant seasonality in the September quarter CPI with the seasonally adjusted estimate rising 0.4%qtr which, which was some 0.2 percentage points lower than the headline estimate and bang on Westpac’s forecast.

Broadly speaking the Australian economy appears to be locked in a low inflation environment where there are some sectors experiencing modest inflation, particularly around housing and health, but being mostly offset by deflationary pressure due to the competitive squeeze in consumer goods. At the stage we struggle to find any broad cyclical upswing in prices that you would normally expect to see at this stage of the economic recovery.

Meanwhile, the S&P/ASX 200 index fell 0.19 percent to 5,884.50 by 02:40 GMT, while at 02:00GMT, the FxWirePro's Hourly AUD Strength Index remained neutral at -36.58 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex

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