Australian bonds slip in muted trading session as investors shrug-off Fed rate cut

The Australian government bonds slipped during Asian session Thursday amid a muted trading day that witnessed data of little economic significance as investors shrugged-off the 25bp interest rate cut by the Federal Reserve late yesterday.

The yield on Australia’s benchmark 10-year note, which moves inversely to its price, rose 1-1/2 basis points to 1.156 percent, the yield on the long-term 30-year bond hovered around 1.726 percent and the yield on short-term 2-year slumped nearly 3 basis points to 0.853 percent by 04:15GMT.

The FOMC cut interest rates for a third time this year by 25bps to 1.5-1.75 percent as widely expected, albeit with two dissenters (George and Rosengren who preferred no change). Fed chair Powell opined that “monetary policy is in a good place” and the “current stance of policy as likely to remain appropriate” as “there’s plenty of risk left but I’d have to say that the risks seem to have subsided”, OCBC Treasury Research reported.

This was in turn interpreted by market players as a “hawkish cut” signalling a pause in further rate cuts. The FOMC statement also omitted the pledge to “act as appropriate to sustain the expansion” but noted the committee will “assess the appropriate path of the target range for the federal funds rate”, the report added.

However, the probability of another 25bp rate cut at the December 11 FOMC has fallen to 22 percent. The S&P500 saw modest gains overnight, while UST bonds initially softened post-FOMC but eventually bull-flattened with the 10-year yield at 1.77 percent after Powell opined that “we would need to see a really significant move up in inflation that’s persistent before we would consider raising rates to address inflation concerns”.

Meanwhile, the S&P/ASX 200 index traded nearly 1 percent down at 6,629.50 by 04:20GMT.