2016.05.0201:11:00UTC+00Australian Bonds Flat ahead of Rba Monetary Policy Meeting

The Australian bonds were trading flat on Monday as investors were cautious ahead of Reserve Bank of Australia’s (RBA) monetary policy meeting. The yield on the benchmark 10-year Treasury note which moves inversely to its price, were flat at 2.516 pct and the yield on the 2-year Treasury bond ticked up 0.54 pct to 1.878 pct by 0505 GMT.

The Reserve Bank of Australia is set to release its next policy statement on Tuesday 3 May (at 04:30 GMT). We foresee that if Reserve Bank of Australia (RBA) wants to ease policy further, then inflation won’t be an issue going by the latest release today, which saw quite a pullback. However, it is unlikely for RBA, which has kept policy on hold, since last summer, will be very much eager to ease policy. Country’s real estate prices are still under upward pressure, due to foreign buying on weaker Aussie and domestic buying on lower interest rates.

The RBA clearly stated in their last policy statement that “continuing low inflation would provide scope to ease policy further should that be appropriate to lend support to demand”. Today's developments have fuelled speculation that the RBA will be forced to cut rates in the coming months. The bond market is now pricing in a more than 53% chance that the RBA will cut rates at their meeting on Tuesday, and a rate cut by September has now been fully priced in.

According recent Reuters poll, 11 of 48 economists expected a cut of 25bp next Tuesday and 37 of them say 'on hold' next week's meeting.

Today, the Australian April Melbourne Institute inflation rose 0.1 pct m/m from flat in March and rose 1.5 pct y/y, from 1.7 pct y/y. Moreover, April CoreLogic RP house price index rose 1.7 pct m/m from 0.2 pct in March, it rose 3.33 pct over the first four months of 2016.

In addition, the Australia’s Treasurer Morrison said that the Reserve Bank of Australia is expected to initiate a cut to company tax in its policy meeting on Tuesday. Said the budget needs to provide impetus in non-mining investment to generate new sources of growth after the mining boom.

"With Japan and the UK out for a holiday on Monday, we expect the market to tread water ahead of the RBA meeting on Tuesday," said ANZ economists in a note.

Meanwhile, Australia's S&P/ASX 200 fell 0.19 pct to 5,214.5 by 0505 GMT.