Yield-curve control snapped in Australia Thursday.
I’m insistent on the notion that it’s never a matter of capacity, but a matter of will when it comes to central banks and yields. To the extent the bond vigilantes of yore still exist out there somewhere — nomads roaming the badlands after being banished from walled-off metropolises decades ago — periodic attacks on the cities amount to aiming slingshots with rocks at turrets manned by soldiers with machine guns. In the era of central bank dominance, would-be vigilantes are simply overmatched. And it’s not close.
However, if central banks lose the will for whatever reason, the market will test them. Following a dramatic day in rates on Wednesday, when Aussie yields surged following a hot inflation print and Canadian rates went wild after the BoC pivoted decisively hawkish, the RBA chose not to defend the cap on the target April 2024 security. The yield doubled, rising as high as 0.54%, more than five times the YCC target.
More generally, three-year yields jumped nearly 30bps Thursday (figure below). It was quite the encore.
On Wednesday, I noted that swaps were pricing a trio of RBA hikes by the end of next year, in stark contrast to Philip Lowe’s timeline. I went on to suggest the RBA’s position “may not be particularly malleable, despite core inflation now exceeding the bank’s year-end forecast.”
Now, though, it looks like the forward guidance may be adjusted. Thursday’s decision not to follow up on last week’s intervention in the April 2024 bond suggests the bank may pivot hawkish next week.
“The market has been pricing in the potential for the RBA to lift the cash rate in 2022 for sometime now,” TD’s Prashant Newnaha remarked. “[This week’s] strong underlying inflation print, exceeding the RBA’s and the market’s estimate by a handy margin, provides the market with the confirmation that its pricing has been right all along and that the RBA is likely to be behind the curve.”
“The RBA is yet to announce bond buying to counter this rise in yields, which the market is taking as a signal that it will relinquish its forward guidance of keeping rates on hold until 2024 at next week’s Board meeting,” Credit Agricole’s Valentin Marinov said, adding that “we think this is a misreading for two reasons: (1) the RBA is switching [the target bond] in November, that is, if it does not change its forward guidance; and (2) the RBA could be waiting for an opportune time to intervene.” He went on to note that “we acknowledge if the RBA does not intervene in the bond market on Friday, it will be a stronger signal.”
In a lively piece (you might even call it hyperbolic), Reuters called the action in Aussie rates “mayhem.” The linked article cited Ray Attrill, head of FX strategy at NAB. “The RBA’s silence was deafening for the bond market,” he said Thursday. “The fact it didn’t protest the rise in yields clearly raises doubts about its commitment to YCC and triggered a massive selloff.”
Reuters went on to say that if the RBA doesn’t intervene Friday, as it did last week, the bank “threaten[s] to unravel the whole thing,” where the “whole thing” means YCC.
Speaking of YCC, the BoJ kept all policy setting unchanged Thursday, but cut its growth projections. The US and Europe aren’t experiencing stagflation, Haruhiko Kuroda said. For that, growth would need to flatline.
As for inflation in Japan, the BoJ’s projections show core will be just halfway to target by 2023.