In late June 2021, the yield on Australia's November 2024 government bond rose to 0.48 per cent before slipping back to 0.42 per cent as an extended lockdown settled over Sydney. The market had come to believe the Reserve Bank would stop its yield curve control at the April 2024 bond, a belief that now sits a little less firmly than before. The coming board decision on the target, along with the size of its bond buying, will show whether that conviction holds, and whether the path toward higher rates the market has quietly charted will begin to take shape.
Sydney Outbreak Tests Bond Market Conviction Ahead of RBA Yield Curve Decision
A market certain about the RBA is now, slightly, less so.
Mark
Why does one bond matter so much?
Mimi
Because it marks where the RBA stops defending its rate target. Stay at the April 2024 bond and the policy ends there. Extend to November 2024 and it runs longer.
Mark
And the market expected it to stop?
Mimi
Largely, yes. After strong May jobs data, the November 2024 yield went from 0.26 to 0.42 per cent, which implied the bank wouldn't buy it.
Luke
Worth noting that's the market's reading, not the RBA's. The bank hasn't said what it will do.
Mark
So what did the lockdown change?
Mimi
The yield touched 0.48 per cent last week, then fell back to 0.42 after the extended Sydney lockdown. Investors rethought a little.
Luke
A little is right. It's back where it was after the jobs data, and Lowe is still expected to hold at April 2024. This is a slight pared bet, not a reversal.
Mark
Why would economists link this to rate hikes?
Mimi
They say not extending the target paves the way for hikes as soon as late next year.
Luke
That's economists' expectation, not a commitment. The article doesn't say how many of them, or what would trigger a hike.
Mark
And the quantitative easing decision?
Mimi
It's also due in July: the size and format of the extension. We don't yet know either.
O Pulso
- The November 2024 bond yield surged from 0.26 to 0.48 per cent, and traders are betting the RBA will not extend its yield target to it.
- A COVID-19 outbreak and an extended Sydney lockdown have forced investors to reconsider their certainty, pulling the yield back to 0.42 per cent.
- The RBA board must decide next week whether to extend yield curve control and how to size its quantitative easing program.
- A decision to hold at the April 2024 bond could clear the way for rate hikes as early as late 2022, while an extension would signal a shift in thinking.
In late June 2021, the yield on Australia's November 2024 government bond rose to 0.48 per cent before slipping back to 0.42 per cent as an extended lockdown settled over Sydney. The market had come to believe the Reserve Bank would stop its yield curve control at the April 2024 bond, a belief that now sits a little less firmly than before. The coming board decision on the target, along with the size of its bond buying, will show whether that conviction holds, and whether the path toward higher rates the market has quietly charted will begin to take shape.
Last week the yield on Australia's November 2024 government bond touched 0.48 per cent. By the weekend, as an extended lockdown took hold in Sydney, it had eased back to 0.42 per cent. The small move reveals something larger: a market that was sure of the Reserve Bank's next step is now a little less sure.
The question before the RBA board at its July meeting is whether to extend its yield curve control policy past the April 2024 bond. The bank has pledged to hold the three-year government bond rate near its 0.1 per cent cash rate, and extending the target would bring the longer-dated November 2024 bond into its purchases.
Most investors have bet the bank will not extend. Economists argue that such a decision would open the way for interest rate hikes as soon as late next year, making this meeting the first step on a longer road toward higher rates. That conviction was built on strong May employment figures, which had lifted the November bond's yield from 0.26 to 0.42 per cent and then to 0.48 per cent.
The COVID-19 outbreak has since shaken that certainty. The market still expects the bank to hold at April 2024 and Governor Philip Lowe to keep to that course, but the confidence behind the view has softened.
The board must also settle the size and format of its ongoing quantitative easing. Next week's outcome will therefore speak to both the yield target and the scale of bond buying. If the target stays at April 2024, the market's expectations will be confirmed. If the lockdown has changed the bank's thinking, the November 2024 bond will be where that shows first.
Last week the yield on Australia's November 2024 government bond touched 0.48 per cent. By the time the weekend's extended Sydney lockdown had sunk in, it had slipped back to 0.42 per cent. That small move is the story: a market that had been certain about what the Reserve Bank would do next week is now, slightly, less so.
The question facing the RBA board at its July meeting is whether to stretch its yield curve control policy beyond the April 2024 bond. Under that policy, the bank has pledged to hold the three-year government bond rate at a market level equal to the 0.1 per cent cash rate. The choice is whether to extend that target to the longer-dated November 2024 bond, which would put purchases of it on the table.
The bond market has largely bet that the answer is no, and that the RBA will end yield curve control where it began, with the April 2024 bond. Economists say a decision not to extend would clear the way for interest rate hikes as soon as late next year. Seen that way, the target decision is the first step on a path toward higher rates.
The conviction rested on strong May employment data released earlier this month. After that report, the November 2024 yield jumped from 0.26 per cent to 0.42 per cent. A yield that high implied, with near certainty, that the Reserve Bank would not start buying the bond. It then climbed as far as 0.48 per cent last week.
Then came the COVID-19 outbreak gripping Sydney and this weekend's extended lockdown. The outbreak has prompted investors to rethink, and the yield on the November 2024 bond has fallen back to 0.42 per cent. That is the same level it reached after the jobs data, so the pullback has only erased the latest leg of the climb. The market still expects the RBA to hold at the April 2024 bond, and governor Philip Lowe is still expected to stick with that target. The change is in how firmly that view is held.
The July meeting carries a second decision as well. The board must settle the size and format in which its ongoing quantitative easing program will be extended. So next week's outcome will tell the market about the target and about the scale of continued bond buying.
What to watch is the board's decision next week. If the RBA keeps the target at the April 2024 bond, it will confirm what the market has priced in and open the road to possible hikes in late 2022. If the lockdown has shifted the bank's thinking, the November 2024 bond is where it would show.
Citações Notáveis
Economists say a decision not to extend the target paves the way for rate hikes as soon as late next year.— Economists cited by the Australian Financial Review
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Leia o original em Australian Financial Review ↗
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