Get Used to Bond Turmoil in Australia as RBA Seen Behind Curve
(Bloomberg) -- Australian bond yields look primed to swing wildly in the months ahead as policy makers struggle to regain credibility with markets.
The gap between where swaps traders see rates in two years time -- 1.5% -- and the three-year benchmark bond yield of 0.9% has risen to its widest in eight years. That suggests plenty of opportunity for volatility as traders reprice their rate expectations on every utterance from a central banker and readacross from economic data releases.
Futures are still pricing in at least three rate hikes by the end of 2022, even after Reserve Bank of Australia Governor Philip Lowe emphasized on Tuesday that inflation is likely to remain too weak to justify an increase for years.
“The RBA expects the conditions for hikes won’t eventuate until late 2023 at the earliest, but the market continues to price in rate increases well before then,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada. Local traders are anticipating aggressive global rate hikes and elevated inflation, and that a faster reopening boosts the Australian economy in coming quarters, she said.
Australia’s central bank bowed to market pressure Tuesday and abandoned its yield curve control policy following last week’s bond meltdown. A resurgence in inflation had caught officials flat-footed and three-year yields shot up to eight times the target rate without the bank taking action.
Liquidity in the bond market evaporated and the short end of the curve was described as virtually untradeable.
“This decision marks one of the most astonishing policy reversals in the almost 30 year history of RBA inflation targeting,” Phil Odonaghoe, an economist at Deutsche Bank AG, wrote in a note on Tuesday. “And one that, we think, will have lasting implications for the RBA’s ability to craft market and community expectations around its policy guidance.”
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