Australian Bonds Drop on Fed Policy, Currency Near 3-Month High

Australia’s bonds fell, pushing 10- year yields to the highest since September, after a Federal Reserve decision to stimulate the economy by expanding Treasury buying crimped investor appetite for safer assets.

The Australian dollar traded near the highest level in almost three months versus its U.S. peer, which tends to be debased by expansionary monetary policy. The Federal Open Market Committee said interest rates will stay low as long as U.S. unemployment remains above 6.5 percent and inflation is in check. The Australian and New Zealand dollars were buoyed as global equities gained and before a private report tomorrow forecast to show Chinese manufacturing is strengthening.

“The market is starting to reflect the global economic backdrop that is looking somewhat better than it had over recent times,” said Gavin Stacey, chief interest-rate strategist in Sydney at Barclays Plc, referring to Australian bond yields. “We think yields in general across the curve are likely to grind higher.”

The 10-year Australian rate rose nine basis points, or 0.09 percentage point, to 3.31 percent as of 4:10 p.m. in Sydney. The equivalent U.S. yield reached 1.72 percent, the most since Nov. 7.

Australia’s dollar was at $1.0551 from $1.0555 yesterday, when it climbed as high as $1.0586, the strongest since Sept. 14. The Australian dollar dropped versus its New Zealand counterpart to NZ$1.2491, the weakest since Oct. 12. The New Zealand dollar fetched 84.43 U.S. cents from 84.36 yesterday, when it touched 84.54, the most since Feb. 29.

The MSCI Asia Pacific Index (MXAP) of shares rose 0.3 percent, following a 0.2 percent gain in the MSCI World Index (MXWO) yesterday.

Economic Target

The Fed said it will buy an additional $45 billion of Treasuries a month from January to spur growth. The central bank said interest rates will stay low “at least as long” as the unemployment rate remains above 6.5 percent and if inflation “between one and two years ahead” is projected to be no more than 2.5 percent.

“Some changes in the Fed’s language on economic targets were a bit surprising,” said Yasuhiro Kaizaki, vice president of global markets at Sumitomo Mitsui Trust Bank Ltd. in New York. “The U.S. dollar sold off and stocks gained, pushing currencies such as the Aussie dollar and the euro higher.”

Benchmark interest rates are 3 percent in Australia and 2.5 percent in New Zealand, compared with as low as zero in the U.S. and Japan, attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

Yearly Performance

The Australian dollar has risen 0.8 percent so far in 2012 according to Bloomberg Correlation-Weighted Index. The kiwi dollar’s 6.5 percent advance over the same period is the best performance among the 10 developed-market currencies tracked by the gauges. The U.S. currency has lost 2.8 percent.

Australia’s dollar “has been an extremely resilient currency over 2012 and looks set to finish the year in stellar form,” Mitul Kotecha, Hong Kong based head of currency strategy at Credit Agricole SA (ACA), wrote in a note to clients today. “Aided by a relatively attractive yield, diversification flows and a bounce-back in China’s economy, the AUD has gained substantial support and looks to maintain this going into 2013.”

HSBC Holdings and Market Economics will release a preliminary reading of a Chinese manufacturing survey tomorrow. The index probably rose to 50.8 in December from 50.5 the previous month, according to the median estimate of economists surveyed by Bloomberg News. China is Australia’s biggest trading partner and New Zealand’s second-biggest export market.

The Chinese data “can often give the Australian market some guidance on how the global story is playing out,” said Barclays’ Stacey. “If we continue to see improvements there, it would support the Australian dollar.”

To contact the reporter on this story: Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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