Aussie Bonds Await RBA’s Return as Yields Edge Up on Supply

(Bloomberg) --

The Reserve Bank of Australia’s two-month absence from the bond market has left analysts guessing when purchases will resume to cap an advance in yields.

Buying may recommence soon as the central bank acts to rein in three-year yields, which have breached the RBA’s target of 0.25%, according to Australia & New Zealand Banking Group Ltd. Commonwealth Bank of Australia suggests buying 2024 bonds in anticipation of the monetary authority’s return.

A bumper supply of bonds to fund stimulus is threatening to boost Australian borrowing costs. Three-year yields have remained largely stable since May despite the RBA’s absence, as a renewed spike in infections in some parts of the country fueled bets that policy will remain accommodative.

Three- to five-year notes may cheapen further as “the market searches for the RBA’s ‘pain’ point,” ANZ strategists including Jack Chambers wrote in a research note on Thursday. “The RBA will ultimately act to correct any material move above 0.25% in the three-year yield.”

The benchmark yield has risen two basis points this week to 0.27%. The government is set to issue A$2 billion each of 2022 and 2029 debt next week.

If the 0.3% levels were “to be sustained, the RBA would resume purchases,” JPMorgan strategists Ben Jarman and economist Tom Kennedy wrote in a note on Friday. “We expect resumption of purchases would be favorable to the flattener.”

Australian bond supply has jumped amid a series of record-breaking syndication issuance, resulting in the nation’s yield curve becoming one of the steepest among major markets.

Government bonds will probably continue to underperform overnight indexed swaps with the Australian Office of Financial Management “unlikely to slow issuance materially,” Philip Brown and Martin Whetton, strategists at Commonwealth Bank of Australia, wrote in a note this week. “The RBA might need to step in” to knock down the three-year yield, they wrote.

©2020 Bloomberg L.P.