Bond traders testing RBA over rate hike timing

Reuters came out with an analytical piece suggesting a divide between the markets pricing of the Reserve Bank of Australia’s (RBA) interest rate hike and the Aussie central bank’s efforts to tame the yields.

“On Friday, the Reserve Bank of Australia (RBA) spent A$1 billion ($750 million) buying in the bond market to try and calm investors who had been testing its resolve to anchor near-term rates at crisis levels,” said Reuters.

The analysis argues, “Yet a yawning gap remains between policymakers - who have repeatedly said they do not expect hikes before 2024 - and the market, which has priced 100 basis points of hikes before the end of 2023, beginning in the second half of 2022,”

The piece also marks the stated divergence between the RBA policymakers and the market bets as the starkest suggesting, “A bumpy resolution that could flow through to credit markets and even housing costs.”

“Government bond futures are traded more heavily than cash bonds, and Australian three-year bond futures touched a two-year low this week and 10-year futures slid to a seven-month trough,” Reuters adds.

It should be observed that RBA Governor Philip Lowe’s latest comments accepted reflationary pressures in Australia but the policymaker stepped back from suggesting tighter policy unless sustainable higher wages growth.

FX implications

As per the latest readings, Australia’s 10-year Treasury yields remain firmer around the yearly peak marked in February, close to 1.78%, whereas the 3-year coupon recovers from a one-week low to 0.75% at the latest.

Also read: AUD/USD struggles below 0.7500 on mixed concerns, sour sentiment