RBA’s resolve put to the test by unruly bond market


The rise in the 2024 bond yield also meant that the Reserve Bank’s subtle efforts on Tuesday to induce a short squeeze did not have the desired effect. It quadrupled the borrowing costs associated with the April 2024 bond and the yield fell to 0.12% during London trading hours.

But it opened significantly higher, making the reprieve short-lived.

“It’s a nifty way to defend your target bond from controlling the yield curve without actually buying the bond,” said Su-Lin Ong, chief economist of RBC Capital Markets, of the increase. borrowing cost tactic. “By making it more expensive to short sell this bond by increasing the fee from 25 basis points to 100, it will hopefully discourage short selling the bond.”

He used the same strategy earlier in the year with greater success when the three-year yield exceeded his comfort zone.

More RBA actions

“The bank could still come in and perform a yield curve control trade,” Ong said, speculating on Thursday or Friday, indicating that she could buy bonds with the specific purpose of lowering yields around that maturity. .

Failure to do so could mark the first sign that the central bank is open to the market message that rate hikes may be needed sooner than expected.

But so far, in a planned bond purchase announcement, the central bank has stuck to its bidding schedule for government bonds as part of its broader quantitative easing mandate, or QE. History shows that he can be patient when needed.

Call the bluff

Some bond traders are skeptical that the mere purchase of April 2024 bonds will have a lasting impact on the yield curve given that the central bank already owns around 60% of the issued shares.

“We don’t know who owns the rest,” said a fixed income trader.

The pain over the April 2024 bond isn’t the only sign of a questionable market: Interest rate derivatives now rate May 2022 as a live meeting for the RBA, with a 50% chance that the cash rate be increased to 0.25% from 0.1 percent.

Likewise, a spot rate of 0.5 percent will be set by the end of next year.

RBA Governor Philip Lowe. Louis Douvis

This is despite Gov. Philip Lowe issuing a cold rebuke to the market last month that the conditions were likely not in place for the RBA to raise rates before 2024, and that it was ‘difficult’ rationalize market expectations that rates could increase in 2022 or 2023.

And, a survey of The Australian Financial Review of 26 economists points out that the RBA will hike rates in mid-2023. This would be the first increase in the cash rate in more than a decade.

Global yields on fire

A feeling of shock inflation in New Zealand on Monday morning prompted bond traders to scramble to reassess the risk of earlier and more aggressive rate hikes in the developed world.

The Australian 10-year government bond yield hit a six-month high of 1.809% on Tuesday, and last traded at 1.803%. The three-year government bond yield (a separate benchmark measure of the April 2024 bond) jumped to 0.775%, an unprecedented level since the start of 2020, before falling to 0.750%.

The market is now waiting for a response.

“The RBA is going to make every effort to send this message that they don’t think the conditions are right for them to raise rates for long,” Ms. Ong said, adding that she was not sure the market believes the story. .

“The market will continue to test them. “

Dr Lowe will speak to a panel of central banks at 6 a.m. AEDT on Friday, potentially offering an opportunity to reaffirm his forward guidance on interest rates. That’s ahead of a very important Consumer Price Index release on Wednesday.


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