Australia 10-year bond yield touches fresh 1-1/2 month high tracking weakness in U.S. Treasuries

Australian government bonds plunged across the board on Thursday after the Federal Open Market Committee’s (FOMC) kept its bias towards further policy tightening, while keeping the fed funds rate target unchanged at 1.75-2 percent.

That heavy sell-off in Australian debt market was largely due to weakness observed in the U.S. Treasuries – where the U.S. 10-year Treasury yield moved above 3 percent mark for the first time since June.

The yield on Australia’s benchmark 10-year Note, which moves inversely to its price, rose 3-1/2 basis points to 2.744 percent, the yield on the long-term 30-year Note also jumped 4 basis points to 3.224 percent and the yield on short-term 2-year traded rose 1/2 basis point to 2.055 percent by 03:40 GMT.

On Wednesday, the Federal Reserve left its interest rate unchanged as widely expected by the market participants and highlighted in its policy statement that economic activity has been strengthening at a strong pace and the labor market has continued to remain solid. This will likely set the stage for the next 25 basis points interest rate hike at the September and December meeting scheduled this year. The U.S. Treasuries plunged following the Fed’s optimism over of the U.S. economy.

"US 10-year yields broke above 3.00% for the first time since June, closing 5 basis points higher at 3.01%. US 2-year yields edged 1 basis point higher. Financial markets are widely braced for two more hikes this year (September and December)," said St. George Bank in its morning report.

St. George Bank further noted that the Fed said it continued to strengthen and on inflation, it remains near 2 percent and the risks are seen to be "roughly balanced". The Fed also reiterated that the stance of policy remains "accommodative". Forward guidance was unchanged with the Fed noting they expect to make "further gradual increases" in the Federal funds target rate.

On the other hand, it is worth noting that the RBA next meeting is scheduled for August 7, where the board members are expected to keep its interest rate unchanged at 1.50 percent.

Meanwhile, the S&P/ASX 200 index traded 0.02 percent lower at 6,202.5 by 03:30 GMT, while at 03:00GMT, the FxWirePro's Hourly AUD Strength Index remained slightly bearish at -76.59 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex