Aussie Bonds Rise With Currency as Investors Weigh Fed Tapering

Australian government bonds rose along with the currency as investors weigh the U.S. central bank’s timing for tapering stimulus that has supported higher-yielding assets globally.

Australia’s 10-year yield dropped before a report today that may show U.S. durable goods orders fell in July for the first time in four months, signaling the recovery in the world’s biggest economy remains patchy. The Australian dollar remained higher after a two-day advance. New Zealand’s currency gained, halting a five-day slide, as Asian stocks climbed.

“Our U.S. economists are still fairly staunch in their view that growth will continue its pickup, but not shoot the lights out,” said Michael Turner, a fixed income and currency strategist at Royal Bank of Canada in Sydney. “At the moment, Australia seems to be very much directed by what’s going on in the U.S. I suspect longer-end yields will track fairly close to the U.S. over the next couple of weeks.”

Australia’s 10-year government bond yield dropped four basis points, or 0.04 percentage point, to 4.01 percent as of 4:52 p.m. in Sydney. The rate on sovereign debt due in three years fell one basis point to 2.78 percent. The nation’s currency added 0.1 percent to 90.40 U.S. cents after gaining 0.7 percent in the two days ended Aug. 23.

New Zealand’s kiwi dollar climbed 0.4 percent to 78.34 U.S. cents, reversing an earlier decline of as much as 0.2 percent. The MSCI Asia Pacific Index of shares rose 0.3 percent.

U.S. Orders

Orders placed with U.S. factories for goods meant to last at least three years probably declined 4 percent last month after gaining 3.9 percent in June, according to the median estimate of analysts polled by Bloomberg News. The Commerce Department said on Aug. 23 sales of new homes plunged in July by the most in more than three years.

The Federal Reserve currently buys $85 billion of debt a month to bolster growth. The U.S. central bank will reduce its purchases to $75 billion at its next meeting on Sept. 17-18, according to 65 percent of economists in an Aug. 9-13 Bloomberg survey.

“There is improvement in the U.S., but it remains far from compelling in terms of sustainable long-term growth,” said Imre Speizer, a market strategist in Auckland at Westpac Banking Corp. “The pace of tapering will itself be highly uncertain. Against the U.S. dollar, the Aussie and kiwi are going to be very volatile.”

Volatility Climbs

One-month volatility for the Aussie climbed 34 basis points to 12.69 percent, set for the highest close since July 16. The equivalent figure for the kiwi rose 26 basis points to 13.10 percent, headed for the most in almost six weeks.

Australia’s dollar has fallen 10 percent this year, the worst performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. Its New Zealand peer has lost 1.5 percent.

Interest-rate swaps data compiled by Bloomberg show traders see a 57 percent chance the Reserve Bank of Australia will cut borrowing costs from 2.5 percent to 2.25 percent or lower by its Dec. 3 meeting. That’s up from 53 percent odds a week ago. There’s a 90 percent probability that policy makers will keep rates unchanged when they next meet on Sept. 3, according to the figures.

UBS AG sees the Aussie falling to 88 cents in a month. “A weaker currency is a necessary condition for full economic rebalancing in Australia,” Singapore-based currency strategist Gareth Berry wrote in an Aug. 24 report. “If the currency refuses to fall of its own accord from current levels, another RBA rate cut would ensure a resumption of the downtrend.”

N.Z. Deficit

In New Zealand, imports exceeded exports by NZ$774 million ($607 million) in July, figures from the statistics bureau showed today. That compares with the median forecast of a NZ$16 million deficit in a separate poll.

Prime Minister John Key said today a Reserve Bank of New Zealand model shows its benchmark interest rate, which stands at 2.5 percent, may rise less due to home-lending restrictions announced by the central bank last week. There’s a 74 percent chance the bank will raise rates to at least 2.75 percent by March 2014, according to swaps data compiled by Bloomberg.

New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, declined one basis point to 3.44 percent.

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