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Australian bond rally moves up a gear on war pessimism

SYDNEY: Last week's grinding rally in Australian bond futures turned into a sprint on Monday, as investors grew increasingly pessimistic about the progress in the Iraq war and sought the comfort of safe-haven government debt.

June 10-year bond futures touched a high of 94.685, 12 basis points higher since Friday, and up smartly from a low of 94.250 just over a week ago.

Turnover was a larger than usual 16,000-plus contracts, although end-of-month and end-of-quarter positioning did drive some of that business.

"Hopes that a quick war will provide an economic lift as uncertainty is lifted and oil prices fall continue to be frustrated by the perceived lack of progress," SG Australia senior strategist John Horner.

"In the medium term, with the US economy showing some signs of renewed softening, yields are likely to remain at relatively low levels, further boosted by geopolitical tensions, which are likely to remain even if there is a successful outcome in Iraq," Horner said.

The local long bond contract has now completed a 50 percent retracement of the steep sell-off from a two-year high of 95.030 down to 94.250. Initial resistance is now around 94.730, being the 61.8 percent Fibonacci retracement of this sell-off.

US consumer confidence fell to its lowest level in a decade in data released on Friday, adding to concerns about Iraq, and causing US stocks to stumble and US Treasuries to rally.

US markets face key manufacturing and jobs data this week.

BORROWING STRONG

In contrast, local data on Monday showed domestic private sector credit jumped 0.9 percent in February to be 12.2 percent higher on the year -- its strongest level in two years, according to Commonwealth Securities senior analyst Craig James.

"The Reserve Bank would conclude that credit remains cheap and freely available, thus ruling out the need for additional stimulus via lower interest rates," James.

The RBA holds its monthly board meeting on Tuesday, but a Reuters poll of 20 economists taken on Friday gave only a 12.5 percent chance of a move in the cash rate this week.

Only one gave any chance of a rate change.

The central bank has held the cash rate at 4.75 percent since June last year.

June bill futures have a 50/50 risk of a rate cut in the second quarter, while the September position has a quarter point move fully priced in.

The February trade balance of goods and services and build approvals are also due on Tuesday.-Reuters