Australian bonds rally on dovish FOMC statement, Brexit risk

The Australian government bonds rallied Thursday after the Federal Open Market Committee (FOMC) left fed funds rate unchanged in a 0.25 to 0.50 percent range, as expected.

Also, bonds extended gains in the wake of the June FOMC meeting that saw a diminished outlook for growth coupled with largely downgraded forecasts for the overnight rate, though median expectations remain unchanged for 50 basis points worth of tightening in 2016.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price fell nearly 6 basis points to 2.014 percent and the yield on short-term 2-year note dipped 5-1/2 basis points to 1.572 percent by 05:35 GMT.

In the global debt market, the benchmark 10-year US Treasury note yield fell more than 4 basis points to 1.550 percent. The 10-year JGB yield added half a basis point to minus 0.190 percent, after plumbing a record low of minus 0.210 before the BOJ's announcement.

Moreover, the Federal Open Market Committee left fed funds rate unchanged in a 0.25-0.50% range, in line with market expectations. One key highlight of the statement was the note that the pace of improvement in the labour market has slowed while growth in economic activity appears to have picked up, adding that although the unemployment rate has declined, job gains have diminished.

The June statement reiterated that inflation has continued to run below the Committee's 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Additionally, the June statement repeated that inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. In terms of risks, the Committee continues to closely monitor inflation indicators and global economic and financial developments.

In addition, the latest polls by various corporate bodies in the United Kingdom in run up to the June 23 Brexit referendum indicate that the percentage of citizens in favor of "leaving" the European Union (EU) has outnumbered those who want to "remain", raising the possibility that Britain might leave the EU after 43 years of membership in the bloc.

In addition, the Australian bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Reserve Bank of Australia's target. Today, crude oil tumbled more than 1 percent for six straight, dragged by a somewhat disappointing U.S. oil data and looming risk of Britain’s departure from the European Union. The American Petroleum Institute (API) showed U.S. crude inventories rose by 1.2 million barrels in the week to June 10 to 536.7 million, against market consensus for a decrease of 2.3 million barrels. The International benchmark Brent futures fell 0.80 percent to $48.56 and West Texas Intermediate (WTI) dipped 0.90 percent to $47.58 by 05:35 GMT.

Markets will remain keen to focus on unemployment rate on Friday at 01:30 GMT. Meanwhile, the benchmark Australia's S&P/ASX 200 index was trading down 0.37 percent, or 18 points, at 5,090.5 by 03:35 GMT.