Taper Tantrum, Aussie Style

In case it wasn’t clear enough that some manner of policy shift is in the offing Down Under, the RBA declined to defend yield-curve control on the target April 2024 bond on Friday.

Although the bank stepped in a week ago, it was obvious by Thursday — when Aussie rates staged an encore after Wednesday’s fireworks — that YCC is dead. Or at least in its current incarnation.

On Friday, the bond sell-off accelerated meaningfully. Australian 10-year yields jumped as much as 27bps to the highest since March of 2020. The yield on the YCC note rose 24bps to almost eight times the target (figure below).

“The lack of RBA intervention in the selloff has reinforced investors’ building expectations that an official policy shift will be announced as early as next week,” BMO’s Ian Lyngen and Ben Jeffery wrote. “The magnitude of the move was notable and speaks to the market dislocation risks associated with exiting QE.”

Indeed it does.

To (very) briefly recapitulate, the problem started in earnest on Wednesday, when a hot quarterly inflation print reinforced expectations for rate hikes far sooner than Philip Lowe’s timeline. Then, on Thursday, things escalated into “mayhem.” After Friday, it’s obvious that the RBA will pivot some semblance of hawkish next week.

“The RBA once again didn’t intervene to defend its yield curve target today, surely a green light they are moving from one form of virtual reality to another,” Rabobank’s Michael Every said, in a somewhat strained effort to fold in a Meta reference. “Or they think they are wearing a VR headset, but are actually wearing horse-blinders with a smiley face painted on the inside,” he added. (At least it’s funny.)

For obvious reasons, analysts are now adjusting their outlooks. National Australia Bank expects the RBA to scrap YCC next week. Another bank called the program “past its use-by date.” The forward guidance will have to be updated too.

Note that three-year Aussie yields are now up almost 100bps this month. That’s the largest monthly increase in more than a quarter century (figure above).

Now we know what an Aussie-style taper tantrum looks like.


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