Australian bonds slump as BoJ leaves interest rate unchanged, modifies policy framework

The Australian government bonds slumped Wednesday as the Bank of Japan leave its monetary policy rate unchanged at -0.10 percent and chose to tweak its current Qualitative and Quantitative Easing (QQE) that introduce fresh dosage of stimulus.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, rose 2 basis points to 2.198 percent, the yield on long-term 15-year note jumped 1-1/2 basis points to 2.562 percent by 04:40 GMT.

According to Reuters, the Bank of Japan added a long-term interest rate target to its massive asset-buying program on Wednesday, overhauling its policy framework and recommitting to reaching its 2 percent inflation target as quickly as possible. The central bank also said it will allow inflation to overshoot its target by maintaining an ultra-loose policy - beefing up its previous commitment to keep policy easy until the target was reached and kept in a stable manner.

At the two-day rate review that ended on Wednesday, the BOJ maintained the 0.1 percent negative interest rate it applies to some of the excess reserves that financial institutions park with the central bank. But it abandoned its base money target and instead adopted "yield curve control" under which it will buy long-term government bonds to keep 10-year bond yields at current levels around zero percent. The BOJ said it would continue to buy long-term government bonds at a pace so that ensures the its holdings increase by 80 trillion yen ($781 billion) per year, Reuters reported.

On Tuesday, the Reserve Bank of Australia released its meeting minutes, which imply that the central bank is in a wait-and-see mode to measure the effect of the May and August rate cuts on the Australian economy, according to ANZ.

The meeting minutes suggested that the central bank’s board normally considers that the Australia’s housing market conditions have softened, even though the RBA let go of the comment regarding the risks in the housing sector have waned. The minutes showed that the board also discussed about the accuracy of lower housing turnover numbers and the forthcoming significant rise in apartment supply.

Moreover, the United States Federal Reserve in its meeting scheduled on September 20-21 and it is widely expected to leave its interest rates on hold, despite concerns that the strength of the world’s largest economy warrants a rise in borrowing costs. The September FOMC statement as a potential rude awakening for markets who have come to interpret 'data dependence' to mean everything has to be perfect for the FOMC to act.

Given the continued support from labour markets and gradual improvement in pricing measures, coupled with a closing window ahead of the November elections, September sets itself up as quite possibly the best time to act (particularly given that supportive data is not something that can be a guarantee come the December meeting).

Meanwhile, the benchmark Australia's S&P/ASX 200 index traded 0.80 percent higher to 5,323.5 by 04:40 GMT.