The Reserve Bank of Australia refused to defend its bond-yield target, a pillar of its quantitative easing programme, unleashing what one trader described as “carnage” in the country’s sovereign bond market.
Markets pushed the yield on the April 2024 Australian government bond to more than 0.7 per cent on Friday, blowing past the central bank’s targeted level of about 0.1 per cent after the bank opted not to intervene. Yields move inversely to bond prices.
Australia is the second country this week to abruptly halt its bond-buying programme, after the Bank of Canada surprised investors on Wednesday by signalling a shift to tighter monetary policy.
The RBA’s decision comes amid growing anticipation that it could raise interest rates as soon as next year.
The Reserve Bank of New Zealand raised rates for the first time in seven years this month, following moves by Norway and South Korea.
The RBA’s decision not to intervene sent shockwaves through the country’s sovereign bond market, with yields on its 10-year bonds jumping 0.11 percentage points to 1.955 per cent, marking their highest level in two and a half years.
“The RBA simply doesn’t show up to defend their yield target, the bonds are slaughtered,” one fixed income trader said, also describing the latest moves for Australian, New Zealand and Canadian bond yields as “massive carnage”.
“Quantitative easing is becoming unglued and it is very messy,” he added. “We’ll see how long the Fed and ECB can hold out.”
Analysts had predicted the RBA could officially drop its yield-targeting programme as early as next Tuesday, when the central bank’s board is scheduled to meet.
David Plank, head of Australian Economics at ANZ, said the central bank’s decision to not intervene was “implicit confirmation” it would abandon the programme.
“They’ve obviously decided not to bother making the effort today, given that on Tuesday they’re probably going to announce an end to it anyways,” he said, adding that a stronger-than-expected reading on consumer inflation published on Thursday had helped to force the RBA’s hand.
The consumer price index reading published this week showed core inflation, the central bank’s preferred measure, breaking into its target range of 2-3 per cent for the first time since 2015.
Economists at Bank of America Securities forecast this week that the RBA would begin raising rates in the fourth quarter of 2022 “in light of today’s data that points to a faster and more sustained rise in inflation”. It had previously said the bank would hold rates until late 2023.
