Australian bonds gain after Fed adopts wait-and-watch approach on monetary policy

Australian government bonds gained across the curve during Asian trading session Thursday after the Federal Reserve signalled patience and flexible monetary policy going ahead. Markets now believe that the Fed has effectively abandoned its hiking bias but stopped short of inciting bearish expectations.

The yield on Australia’s benchmark 10-year note, which moves inversely to its price, fell over 1 basis point to 2.24 percent, the yield on the long-term 30-year bond remained steady around 2.77 percent and the yield on short-term 2-year slumped 2 basis points to 1.852 percent by 04:10 GMT.

Overnight, the Fed kept its benchmark interest rate, the fed funds rate, on hold, as was widely expected by market participants, but shifted its policy guidance language in a dovish direction. Following that the U.S. short-term bond yields and the greenback fell. But the U.S. equities extended earlier gains as expected.

“The U.S. 10-year treasury yield initially rose from 2.71 percent to 2.73 percent ahead of the FOMC decision, partly helped by strong private-sector jobs data. But the 10-year yield then fell to 2.70 percent in response to the dovish statement, before closing at 2.72 percent. The U.S. 2-year yields fell from 2.59 percent to 2.51 percent,” noted St.George Bank.

“Futures markets continued to price little chance of any further Fed rate hikes in this cycle, with only a 1 percent chance assigned to the March meeting and a 10 percent chance to the June meeting.”

Going ahead, the latest round of U.S.-China trade talks in Washington is also a major focus.

“The latest announcement of immediate reform such as allowing the rating agency S&P to rate China’s domestic bond is likely to build goodwill for China to achieve a general framework with the U.S. to avoid the further tariff hike, which may also pave the way for China’s structural reforms,” noted OCBC Bank.

Meanwhile, the S&P/ASX 200 index traded 0.31 percent lower at 5,827.50 by 04:20 GMT, while at 04:00GMT, the FxWirePro's Hourly AUD Strength Index remained highly bullish at 108.42 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex