Australian bonds jump tracking U.S. Treasuries despite Fed rate hike; Powell drops on 'accommodative' policy

Australia government bonds jumped across the curve during Asian session Thursday, tracking a similar movement in the United States counterpart even as the Federal Reserve adopted a rate hike in its monetary policy meeting, held overnight, as was widely anticipated by market participants. Further to that, Fed Governor Jerome Powell remained slightly dovish in his policy tone, flagging he does not believe inflation to surprise on the upside.

The yield on Australia’s benchmark 10-year note, which moves inversely to its price, slumped nearly 3-1/2 basis points to 2.707 percent, the yield on the long-term 30-year bond plunged nearly 4 basis points to 3.191 percent and the yield on short-term 2-year traded 3 basis points lower at 2.069 percent by 03:30GMT.

The Fed raised the target range for the federal funds rate by 25bp, to 2.0-2.25 percent, which was widely expected. The FOMC continues to have an optimistic view of the effects of fiscal policy on economic activity and the US economy’s ability to withstand shocks. The September statement continued to describe the economy as “strong.”

However, surprisingly, the committee removed the language that said monetary policy “remains accommodative.” In light of an unchanged policy path, this confirms that members expect monetary policy to become restrictive over time. Economic projections for 2021 include growth slowing to potential and a rise in the unemployment rate to 3.7 percent from 3.5 percent, Barclays Research reported.

"With the Fed set to stay on autopilot for now, US rates are set to stay a source of USD support. This should help cement the status of the dollar as a carry currency both in terms of the level of, and the change in, short-end yields. With the Fed still keen to continue the process of moving rates back towards 'neutral', it remains too early in our view for the FX market to price the Fed going on hold," Danske Bank reported in its latest research.

Meanwhile, the S&P/ASX 200 index rose 0.35 percent to 6,184.5 by 03:40GMT, while at 03:00GMT, the FxWirePro's Hourly AUD Strength Index remained highly bearish at -120.89 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex