Australian bonds slump after Yellen signals strengthening rate hike possibilities

The Australian government bonds slumped Monday as investors drove out of safe-haven buying after the Federal Reserve Chair Janet Yellen spoke at the annual Jackson Hole Symposium on Friday, hinting that the possibilities of increasing policy rates have strengthened in recent months.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, rose nearly 2 basis points to 1.942 percent and the yield on short-term 3-year climbed 2 basis points to 1.472 percent by 04:00 GMT.

On the other hand, weak equities and volatile crude oil prices limited the growth in bond yields.

At the Jackson Hole Symposium, Yellen said that the FOMC continues to anticipate that gradual increases in the federal fund rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives. She said that in light of the continued solid performance of the labour market and the Fed’s outlook for economic activity and inflation the case for an increase in the federal funds rate has strengthened in recent months. However, Yellen furthered that of course, the Fed’s decisions always depend on the degree to which incoming data continues to confirm the Committee's outlook.

On Friday, the preliminary gross domestic product (GDP) increased 1.1 percent in the second quarter of 2016, well below market expectations for a +1.2 percent result, from the revised +0.8 percent reading seen in the first quarter of 2016 (previous was +1.1 percent).

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.

Crude oil prices declined more than 1 percent at the start of the week as Iran said it would only cooperate in talks to freeze output if other exporters recognized its right to full regain market share. Also, data showed that Iraq is producing 3.205 million barrel per day in August compared to 3.202 million barrel per day in July. The International benchmark Brent futures fell 1.26 percent to $49.52 and West Texas Intermediate (WTI) dipped 1.39 percent to $46.98 by 04:00 GMT.

Meanwhile, the benchmark Australia's S&P/ASX 200 index traded 0.73 percent lower to 5,443.5 by 04:00 GMT.