Australian bonds sag ahead of FOMC meeting

The Australian bonds plunged on Tuesday as investors await for Federal Reserve’s monetary policy meeting and Federal Reserve Chair Janet Yellen’s speech in an attempt to estimate the Fed's likely next step to raise interest rate. Also, firm crude oil prices drove-out investors from safe-haven assets. The yield on the benchmark 10-year Treasury note which moves inversely to its price, moved higher 1.10 pct to 2.668 pct and the yield on the 2-year Treasury bond ticked up 0.77 pct to 2.082 pct by 0500 GMT.

U.S. Federal Reserve policymakers meet on April 26-27 and markets largely expect that interest rates will be kept steady with a slim possibility of a surprise hike. Focus will be on the press statement and whether there is a shift across the Fed members to a more hawkish stance.  Even subtle changes in the wording of its statement will tell us a lot about the probability of a June hike. Recent comments have been far more hawkish than the market is currently pricing in on rates.

"I don't think they can pull off a June hike without triggering another round of volatility, and they don't want that because the selloff in January and February left a deep scar. The FOMC can't go too hawkish overnight because markets aren't pricing in anything close to that." said Aneta Markowska, chief U.S. economist at Societe Generale.

Moreover, 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 prices rose by tracking weak greenback and stream on fresh liquidity into the market. Meanwhile, Crude oil prices continue to rover around 5-month high. The International benchmark Brent futures rose 0.52 pct to $44.55 and West Texas Intermediate (WTI) climbed 0.59 pct to $42.89 by 0500 GMT.

“Investors are cautious ahead of Thursday's policy decisions from central banks in the US, Japan and New Zealand, with fixed income and currency markets largely at a standstill,” said ANZ economists in a note.

"The Fed is widely expected to stick to the script and flag a gradual and data-dependent path of policy normalisation; bond prices were down slightly overnight but had moved notably lower over the past week,” they added.

The investors will now look forward to Q1 Consumer Price Index (CPI) on Wednesday (0130 GMT), which is expected to rise 0.3 pct q/q in the first quarter of 2016, as compared to 0.4 pct q/q in the last quarter of 2015.

Meanwhile, Australia's S&P/ASX 200 fell 0.30 pct to 5,192.5 by 0500 GMT.