Australian government bonds extended their biggest rout since 2001, sending the 10-year yield to the highest level in 14 months, on prospects that an early exit from monetary stimulus by the Federal Reserve will drain funds that have helped inflate global asset prices.
The Aussie dollar fell as much as 0.7 percent to the lowest since September 2010. Fed Chairman Ben S. Bernanke said on June 19 the U.S. central bank may slow quantitative easing this year and end it in mid-2014 if economic improvement continues. The spread between the Australia’s 3-year and 10-year yields widened to the most since February 2010 before the Reserve Bank of Australia meets on policy next week.
“This is all about tapering and what the Fed is going to do having a knock-on effect around the world,” said Derek Mumford, a director at Rochford Capital, a currency risk-management company in Sydney. “We can look for yield-curve steepening, with the short-term rates coming down as there’s still potential for the RBA to cut rates and longer-term rates pushing up.”
The yield on Australia’s 10-year government bond surged 28 basis points, or 0.28 percentage point, the biggest jump since January 2009, to close at 4.03 percent in Sydney, reaching the highest since April 2012. The benchmark yield climbed 39 basis points last week, the most since November 2001. The three-year rate rose as much as 17 basis points to 3.01 percent, a level unseen since March 26.
The extra yield investors demand to hold 10-year notes instead of 3-year securities was at 103 basis points, the most since February 2010.
The Australian dollar fell 0.4 percent to 91.82 U.S. cents at 5:39 p.m. in Sydney from June 21, when it capped a 3.7 percent weekly drop, the biggest since the five-days ended Sept. 23, 2011. It touched 91.57, the weakest since September 2010.
New Zealand’s kiwi dollar fell 0.1 percent to 77.40 U.S. cents from the end of last week. It touched 77.01 on June 21, the lowest in a year. New Zealand’s 10-year yield climbed as much as 14 basis points to 4.24 percent today, the highest since April 2012. The nation’s two-year swap rate, a fixed payment made to receive a floating rate, reached 3.245 percent, matching the highest since October 2011.
The U.S. central bank left the monthly pace of its bond purchases unchanged at $85 billion at the conclusion of a policy meeting on June 19, while saying that “downside risks to the outlook for the economy and the labor market” have diminished.
The Fed Bank of Dallas’s general economic index probably increased to minus 1 this month from minus 10.5 in May, according to the median estimate of economists surveyed by Bloomberg News before the data today.
Economists in a separate Bloomberg poll estimate the Chicago Fed national index, a weighted average of 85 economic indicators, improved to minus 0.15 in May from minus 0.53 a month earlier.
Futures traders increased their bets that the Australian dollar will decline against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show.
The difference in the number of wagers by hedge funds and other large speculators on a decline in the Australian dollar compared with those on a gain -- so-called net shorts -- was 63,521 on June 18, the most bearish in data going back to January 1993 and compared with net shorts of 63,277 a week earlier.
The Aussie’s relative strength index versus the greenback was at 29 today, below the 30 level some traders see as a sign that an asset’s price has fallen too rapidly and is poised to reverse course.
Australian Prime Minister Julia Gillard said an extension of recent declines in the Aussie would help rebalance growth.
“A sustained depreciation of the Australian dollar in those circumstances would be a very good thing, to stimulate further growth in the non-mining sector -- while the firms that have adjusted to the historically high dollar stand to benefit from its fall,” Gillard said in a speech in Canberra today.
Interest-rate swaps data compiled by Bloomberg show traders see about a 20 percent chance the RBA will lower its benchmark for borrowing costs by 25 basis points to 2.50 percent at the next meeting on July 2.
Demand for the Aussie and kiwi dollars was supported after the People’s Bank of China said the nation should “appropriately fine-tune” its policies, according to a statement on its website yesterday that summarized the monetary policy committee’s second-quarter meeting in Beijing.
It was the first time since September that the panel, led by Governor Zhou Xiaochuan, has used the “fine-tune” phrase, suggesting officials are more open to loosening policies. China is the biggest trading partner for both Australia and New Zealand.