Australian bonds slump on hopes of U.S.-China trade deal; Q4 inflation data in focus

Australian government bonds slumped across the curve during Asian trading session Tuesday as markets remain optimistic for a possible U.S.-China trade deal. Also, investors now eye Q4 inflation data.

The yield on Australia’s benchmark 10-year note, which moves inversely to its price, rose 3-1/2 basis points to 2.247 percent, the yield on the long-term 30-year bond also jumped 4 basis points to 2.763 percent and the yield on short-term 2-year also traded nearly 3 basis points higher at 1.851 percent by 03:40 GMT.

“Markets remain optimistic for a possible U.S.-China trade deal. Having relented on the U.S. government shutdown, President Donald Trump needs to show a win on trade at his State of the Union address on 5 February,” noted Philip Wee, FX strategist at DBS group research.

"But this morning’s indictments by the U.S. Department of Justice against China’s Huawei, its chief financial officer, and two bank affiliates illustrate the risks attached to the U.S.-China relationship."

Overnight, yields on the U.S. Treasuries fell, as risk appetite weakened, the U.S. 10-year yields slipped 2 basis points to 2.74 percent. Financial markets are pricing in virtually no chance of a move in rates at the Federal Reserve decision due Wednesday.

On the other hand, global growth worries resurfaced, as key manufacturer Caterpillar warned of slower demand in China. Weaker sentiment weighed on stocks, bond yields and the Australian dollar. Oil prices also fell.

“Australian business conditions fell sharply in December and now sit below their long-term average for the first time since January 2016. The month-to-month drop was the largest since the GFC,” ANZ noted.

“The RBA is generally slow to shift its underlying view, but the case for a material shift is building.”

Markets would now eye Q4 inflation data release, which is scheduled for Wednesday, January 30. It is expected to remain flat at 0.4 percent q/q and decline to 1.7 percent y/y.

Meanwhile, the S&P/ASX 200 index traded 0.33 percent lower at 5,812.50 by 04:00 GMT, while at 04:00GMT, the FxWirePro's Hourly AUD Strength Index remained highly bullish at 127.06 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex