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Australian bonds tad higher after China cancels trade talks with U.S.

Australian government bonds traded a little higher during Asian session Monday after China canceled trade talks with the U.S. following a recent escalation in trade tensions. Markets now await the FOMC policy decision scheduled for Wednesday, where an interest rate hike is fully priced in.

The yield on Australia’s benchmark 10-year note, which moves inversely to its price, fell 1 basis point to 2.706 percent, the yield on the long-term 30-year bond traded 1-1/2 basis points lower at 3.192 percent and the yield on short-term 2-year dipped 1-1/2 basis points to 2.096 percent by 03:20GMT.

China withdrew from trade talks with the U.S. over the weekend ahead of the expected introduction of fresh tariffs on Chinese and U.S. imports probably today. While the ongoing trade tensions will remain in the background, this week the Australian bonds’ fate will be decided by the tone of the FOMC.

“(The) US bond yields initially edged higher, but retraced those gains to finish unchanged, although they remain at an elevated level. The yield on the 10-year US government bond finished at 3.06 percent, with the yield on the 2-year government bond at 2.80 percent. Markets are fully pricing in a rate hike from the US Federal Reserve on Wednesday,” noted St.George Bank in its morning report.

St.George Bank further noted that on Friday, Standard & Poor’s (S&P) upgraded the outlook on Australia’s AAA credit rating from negative to stable. The S&P said that it expected “steady government revenue growth supported by the strong labor market and relatively robust commodity prices, to be accompanied by expenditure restraint”. The favourable economic conditions and the impact to the government’s bottom line is more than offsetting any concerns over recent political uncertainty.

Meanwhile, the S&P/ASX 200 index traded 0.18 percent higher at 6,185.5 by 03:30 GMT, while at 03:00GMT, the FxWirePro's Hourly AUD Strength Index remained neutral at 40.83 (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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