Currency Point: Martin Place, we have a problem

What is taking place in the Australian bond market right now is ‘popcorn’ viewing at its best.

We are witnessing a central bank losing control of one of its cornerstone COVID policies with not so much as a whimper.

Under the March 2020 special policy announcements, the RBA introduce a Yield Curve Control (YCC) on the Australian 3-year bond to be at or near 0.1 per cent. This has, by enlargement, been the case since its introduction.

However, over the past few weeks, the market has begun to question if the RBA has been too slow to react to growing speculation that inflation and economic activity are moving at significantly faster rates than forecasted and that policy will need to change much sooner than forecasted.

This led some to ‘test’ the resolve of the RBA by driving up the yield on the April 2024 bond to 0.22 per cent late the week before and early last week. RBA quickly defend this position pushing the yield back below target.

However, this was short-lived as Australia’s core Consumer Price Index (CPI) crossed over and into the 2 per cent to 3 per cent band for the first time since the September quarter of 2015, a surprise read and a level of momentum that was not foreseen. This gave the market an incentive to attack the YCC again – but this time it has done so with success.

That complete lack of action from the RBA last Thursday took a lot by surprise, which lead to even more vigilantism from bond traders.

The Australian 3-year bond went from 0.24 per cent to 0.53 per cent in a matter of hours as it woke up to the idea that the RBA was ‘out’. Stoking this even further was Friday’s news that the RBA was making no offer to buy the April 2024 bond. With no more bids from a known buyer, there was only one way for bonds to go and that was down.

The Aussie 10-year hit 2 per cent for the first time since March 2019 and has kept going.

The 30-year bond is now at a 30 per cent discount to face value. And that April 2024 hit 0.823 per cent late on Friday as the cat was let out of the bag.

Currency Point: Martin Place, we have a problem, FP Markets

This is as ugly as ugly gets – and it feels like this is an Australian styled 2013 taper tantrum that is happening right before our eyes.

It makes this Tuesday’s RBA board meeting all that more exciting, in fact, it could be one of the biggest RBA meetings of the post-COVID era, right up there with March 2020 and July
this year.

Things are “a-changing” and Martin Place has a problem – so too will markets if they do not explain what their next move may be.

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