Australian bonds rally after Fed downgrades economic outlook, keeps policy rate unchanged

The Australian government bonds rallied Thursday after the United States Federal Reserve downgraded its economic outlook and the Federal Open Market Committee left fed funds rate unchanged in a 0.25-0.50% range, in line with market expectations.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, fell 9-1/2 basis points to 2.098 percent, the yield on long-term 15-year note dipped 9 basis points to 2.466 percent and the yield on short-term 2-year slid 2-1/2 basis points to 1.605 percent by 05:10 GMT.

The Federal Open Market Committee left fed funds rate unchanged in a 0.25-0.50 percent range, in line with market expectations. One key highlight of the statement was the note that near-term risks to the economic outlook appear roughly balanced. However, the Committee continues to closely monitor inflation indicators and global economic and financial developments.

Additionally, the statement noted that information received since the July meeting indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year. This is shows renewed support for the outlook, advancing from the improvement noted in the July statement.

The updated individual Fed forecasts for 2016 revealed GDP lower at 1.7 percent to 1.9 percent, from previous forecast of 1.9 percent to 2.0 percent, unemployment rate at 4.7 percent to 4.9 percent, from 4.6 percent to 4.8 percent and PCE inflation at 1.2 percent to 1.4 percent, from previous estimates of 1.3 percent to 1.7 percent.

Longer-term inflation expectations kept unchanged  at 2.0 percent, alongside longer-run unemployment at 4.7 percent to 5.0 percent. Overall, the median forecast for the midpoint of the target rate/range is around 0.625 percent by the end of 2016, down from 0.875 percent and 1.125 percent by the end of 2017, down from 1.625 percent.

Meanwhile, the benchmark Australia's S&P/ASX 200 index traded 0.37 percent higher to 5,376.5 by 05:10 GMT.