Australian bonds plunge as Fed November meeting minutes reflect support for a December move

The Australian government bonds plunged Thursday as investors moved away from the safe-haven buying amid weakness in the U.S. Treasuries after the Federal Reserve November meeting minutes reflected support for a December rate hike.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, rose more than 6 basis points to 2.78 percent (highest since January this year), the yield on 15-year note jumped 4-1/2 basis points to 3.17 percent and the yield on short-term 2-year bounced 3 basis points to 1.86 percent by 04:30 GMT.

The Australian bonds have been closely following developments in the U.S. debt market. The United States benchmark 10-year Treasury yield jumped 4 basis points to 2.35 percent.

Minutes from the 1 - 2 November FOMC meeting indicated that participants generally agreed that based on the relatively limited information received since the September FOMC meeting that the case for increasing the target range for the federal funds rate had continued to strengthen. Minutes indicated that labour market conditions had improved further and considered the firming in inflation and inflation compensation to be positive developments, consistent with continued progress toward the Committee's 2 percent inflation objective.

However, a number of participants expressed the view that some modest slack remained in the labour market or noted that readings on inflation compensation and inflation expectations remained low, alongside some participants who suggested that current conditions did not point to an immediate need to tighten policy or that some further evidence of continued progress toward the Committee's objectives would provide greater support for policy firming.

Nevertheless, most participants expressed a view that it could well become appropriate to raise the target range for the federal funds rate relatively soon as some participants noted that recent Committee communications were consistent with an increase in the target range for the federal funds rate in the near term or argued that to preserve credibility, such an increase should occur at the next meeting.

Moreover, RBA Assistant Christopher Governor Kent said the prospects for the mining States are improving as the drag from unwinding resource investment lessens and as commodity prices lift. He said that the central bank is expected the terms of trade to shift from the substantial headwind of recent years to a slight tail breeze providing some support to the growth of nominal demand.

Kent noted the fall in the unemployment rate from its 2015 high is likely to have overstated the extent of the improvement in the labour market. Kent said a key concern from US President-elect Trump is trade restrictions, although he said protectionism is more deep-seated in the world than just sentiment from Trump.

Last week, the Reserve bank of Australia in its November meeting minutes mentioned that the underlying inflation is expected to return to normal levels over time and the Australian economy is seen growing close to potential over the next few quarters, before picking up further.

Further, the minutes repeated that a rising Australian dollar could complicate the economic transition and holding policy rate steady in November meeting was consistent with growth and inflation goals. It further mentioned that a steadier Chinese economy had reduced downside risks to the global growth outlook, while risks to global inflation outlook more balanced than for some time.

Meanwhile, the benchmark Australia's S&P/ASX 200 index traded 0.21 percent lower to 5,485.5 by 04:30 GMT. While at 04:00 GMT, the FxWirePro's Hourly Australian Dollar Strength Index stood neutral at -7.69 (lower than -75 represents purely bearish trend).