Australian Bonds Rally as Rates Traders Pare Hike Bets After Fed

(Bloomberg) --

Australia's bonds surged, sending short-end yields down by the most in six months, as a calmer-sounding Federal Reserve took the heat out of investor bets on aggressive interest-rate hikes.

Aussie three-year yields dropped 17 basis points to 2.96%, the biggest one-day decline since Nov. 1, while 10-year yields fell 15 basis points to 3.39%. Fed Chair Jerome Powell pushed back Wednesday against the possibility of 75 basis point hikes, saying they are not something that is being actively considered.

Australia's 10-year yields reached the highest since 2014 on Wednesday as cash-rate futures priced in the largest annual pace of interest-rate increases since the 1980s. Thursday's rally adds to the wild swings that have swept across local and global bond markets over the past six months as central bankers moved to unwind pandemic-era stimulus in the face of epic spikes in inflation.

“The levels of volatility the rates market is exhibiting is making it increasingly difficult to hold strategic positions,” said Prashant Newnaha, a Singapore-based rates strategist at TD Securities. “Profit taking and short squeezes leave the market inclined to trading tactically.”

Biggest Drop

The Reserve Bank of Australia delivered its first interest-rate increase since 2010 via a larger-than-expected 25 basis point move on Tuesday. The yield on cash-rate futures for December fell 14 basis points to 2.89%, the biggest decline since the contract started trading in July.

Bonds accelerated gains after Australian housing data disappointed and a gauge of China's services industry slid to the weakest level in more than two years in April as Covid lockdowns pummeled consumer spending.

The Fed raised its benchmark by 50 basis points as economists forecast, and Powell said the central bank won't hesitate to deliver even higher rates if they are required. U.S. 10-year yields climbed two basis points Thursday to 2.95% after dropping four basis points Wednesday.

“With a 75 basis-point hike perhaps less likely, there is plenty of room for the bond market to consolidate and perhaps retrace a little, following the wild rise in yields over the past few months,” said Andrew Ticehurst, a rates strategist in Sydney at Nomura Holdings Inc.