Australian bond futures slide on inflation fears, A$ slips

SYDNEY: Australian three-year bond futures dipped to a one-week low on Monday, implying yields of nearly 0.3%, as investors feared a stellar economic recovery would rekindle inflation and spur interest rate hikes.

A global bonds sell-off gathered momentum last month on worries massive US fiscal stimulus and pent-up consumer demand would flare inflation with expanding vaccination campaigns expected to bring an end to lockdowns.

In Australia, the country's central bank responded last week by doubling the fee it charges for lending out April 2023 and April 2024 government bonds.

Moreover, Reserve Bank of Australia (RBA) Governor Philip Lowe also forcefully pushed back on market pricing for rate hikes.

While that did calm the market, bond yields have again resumed their upward trek.

"Looking ahead, and despite the recent RBA tweaks... we believe there is still some value in holding a short position," said Robert Thompson, a Sydney-based rates strategist at RBC.

"The RBA's tweaks have certainly reduced the outright yields on Apr-23s and Apr-24s, but it hasn't shifted overall basket repo rates enough to completely get rid of the arbitrage," Thompson added.

"At very least, the change in pricing probably hasn't forced stop-outs, although it may see some choosing to take their positions off."

The spike in bond yields did little to push the Australian dollar higher which was down for a second straight session at $0.7747, drifting away from a three-high high atop 80 US cents touched late last month.

Nomura's rates strategist Andrew Ticehurst said he was "positive on the AUD" driven by stronger US equities, a weaker US dollar and impressive domestic data.

Ticehurst expects a "less dovish tilt" from the RBA around mid-year.

Earlier in the day, RBA Governor Lowe emphasised Australia's A$2 trillion economy still has a long way to go despite recent better-than-expected data, reiterating policy settings will be maintained for as long as is needed.

The New Zealand dollar was up 0.3% at $0.7196, still far away from a 3-1/2-year high of $0.7463 seen last month.

The kiwi has drifted away from a recent trough at $0.7100, which now marks strong support.

New Zealand government bonds fell with yields 11-12 basis points higher at the long end of the curve.

In Australia, the three-year government bond futures contract fell sharply to 99.706 from Friday's close of 99.764 while the 10-year contract fell 8 ticks to 98.177.