Curve Control Under Attack in Australia as Traders Bet on Shift

(Bloomberg) -- Australia’s sovereign bond yields surged Thursday after the central bank chose not to defend its yield target, raising speculation that it could adjust its policy guidance next week. 

The rate on the April 2024 note more than doubled, jumping as much as 30 basis points to 0.51%. That took the gap to the Reserve Bank of Australia’s 0.1% target to the widest since yield control was introduced in March 2020.

Governor Philip Lowe and his peers are being challenged by market expectations that they’ll need to tighten policy more rapidly than previously thought. Data Wednesday showing Australia’s core consumer prices rose at the fastest pace in six years helped spark a flattening in global sovereign yield curves, with Bank of Canada adding to the impetus by signaling a rate hike as early as April.

“I think if the RBA doesn’t step in to buy the April 2024 bonds tomorrow, then the risks are certainly increased that the RBA will announce a change to its forward guidance next week,” said Hayden Dimes, an economist at ANZ Banking Group “Not buying bonds tomorrow will fuel the markets expectation that next week Governor Lowe will move away from his guidance of no rate hikes till 2024.”

While the RBA announced this morning it would buy A$1.6 billion ($1.2 billion) of longer-dated securities as scheduled, it passed up the opportunity to follow up on last Friday’s unscheduled purchases of April 2024 bonds. That earlier move was the first such intervention since February and came after the yield had reached 0.18%.

The yield on the three-year government bond that matures in November 2024 jumped to 1.10% on Thursday, the highest in more than two years, soon after the RBA’s purchase announcements. It then came back to 1.05%. 

Lowe, who will lead his board’s November policy meeting on Tuesday, has repeatedly pushed back against bets on early rate rises, pointing out that Australia’s wages growth remains subdued and there are few obvious alternative sources of inflation pressure. 

Yet Wednesday’s inflation data showed Australian third-quarter underlying inflation has jumped back inside the RBA’s 2-3% target range for the first time since 2015. 

Swaps traders are signaling they expect the RBA cash rate to be 0.91% within a year, from 0.1% now. 

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