Curve Control Under Attack in Australia as Traders Bet on Shift
Comment of the Day

October 28 2021

Commentary by Eoin Treacy

Curve Control Under Attack in Australia as Traders Bet on Shift

This article from Bloomberg may be of interest to subscribers. Here is a section:

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.”

Eoin Treacy's view

Yield curve control didn’t last very long in Australia. Today’s upward dynamic in short-dated yields suggests the RBA is abandoning the policy and preparing the market for interest rate hikes.

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