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Bonds firm on flood levy

contentThe Australian bond market closed firmer following the announcement of a flood levy by the federal government.

At 1630 AEDT on the ASX 24, the March 10-year bond futures contract price was at 94.450 (implying a yield of 5.550 per cent), up from Tuesday’s close of 94.415 (5.585 per cent).

The March three-year bond futures contract price was 94.900 (5.100 per cent), up from 94.860 (5.140 per cent).

RBC Capital Markets interest rate strategist Michael Turner said the local market firmed on the Gillard government’s plans to introduce a one per cent levy on incomes over $100,000 to help fund the reconstruction effort in flood ravaged Queensland.

“It was a bit more fiscal tightening than people were expecting, and might mean less monetary tightening,” he said.

By monetary tightening, Mr Turner was referring to the Reserve Bank of Australia’s (RBA) benchmark interest rate, currently at 4.75 per cent.

Ms Gillard told journalists on Thursday her government would also impose a one-off flood levy of 0.5 per cent for middle income earners.

“Anyone earning under $50,000 will not pay the levy,” Ms Gillard told the National Press Club on Thursday.

Market economists, prior to January’s floods and a smaller than expected jump in inflation for the December quarter, speculated there was a chance the RBA would take the rate higher by March.

Most have since pushed their forecasts to later in the year.

Australian government bonds fall if the market judges that interest rates are more likely to rise because existing fixed interest products will return less in comparison.

Mr Turner said he expected a quiet night of trade, with no market moving data due.

Story source: www.smh.com.au

Tags: bonds, economy, floods, money, shares, stocks

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