What will the RBA do about yields?

The RBA meets tomorrow amid some serious bond market and yield turbulence. This is new territory for the bank. It was only the last meeting that it “shocked” markets by extending its QE program. So, is it prepared to shock again?’

Via UBS:

Higher bond yields now imply a very material RBA rate hike cycle

The recent move in AU 10Y yields is the largest since the initial COVID-driven bond selloff in March-2020; and, before then, the ‘taper tantrum’. Importantly, we show that the current shape of the Australian Commonwealth Government bond curve (ACGB) implies a steep RBA tightening cycle, hiking by c.140bps in c.12 months from Q1-24, i.e. the end of the Yield Curve Control (YCC) period, to Q1-25; with a terminal rate of 1.75% (higher than before COVID). We judge that a lot of good news is, by now, priced and that upside from here is limited. If the AU 10-year yield reaches c.2% (now c.1.7%), it will be a very good level to buy duration.

Higher real yields now hurt equities but better economic growth can cushion

Consistent with our global strategists’ results for the US, we find that Australian equities have become negatively correlated with real bond yields. Resources are less impacted by rising yields (in line with our previous research). We also use commodity prices to proxy global growth and find that the market can withstand an incremental 10bps rise in real yields for a 1% positive growth shock (8bps in the US).

A few points:

  • I wouldn’t be long growth yet. If yields back-up some more, which seems likely to me, growth will get creamed.
  • But, markets are seriously wrong about Australia leading a global inflation rebound so don’t discount a rotation reversal ahead.

Will the RBA step in tomorrow? Chris Joye today muses:

  • There is nothing sacrosanct about the RBA’s $100bn of asset purchases. It could easily be more.
  • It is still behind all other central banks at 16% of government bonds versus 23% in the US and 40% in NZ.
  • It should do MOAR not less because purchases do not impact mortgage rates and house prices.
  • It could make the amount a dynamic review every meeting.
  • The RBA needs a “whatever it takes” moment.

Some good points there. This is a real test of the RBA’s new spots. If I were them I would double my purchases and roll them out the curve in a proximate version of the Fed’s “Operation Twist”.

I do think that the RBA will do this in due course. But is it ready to go this week? I am doubtful.

Years of extremely conservative policymaking at the bank is not easily shrugged off.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)

Comments

  1. happy valleyMEMBER

    “Years of extremely conservative policymaking at the bank is not easily shrugged off.”

    They will go NIRP before the end of the calendar year because they are having so much fun with experiments and their private bankster masters want them to finish retail depositors off.

    • RapeGate has been conveniently broken out from the depository of closet skeletons to distract from the spectre of suddenly higher interest rates on mega mortgages 😉

  2. pfh007.comMEMBER

    Nothing like a central bank buying up wealth assets of rich people to force up the price (and reduce their yield).

    The things we will do to make the mangy product lines of debt peddlers more attractive.

    End the monopoly of bankers over deposit accounts at the RBA and the solutions become very simple.

    Stop propping up a dysfunctional model.

    Allow all Australians and non-bank local organisations to operate accounts at the RBA.

    Reform is only difficult if you lack a bit of courage.

    • These ratbags are sooo responsible for the misallocation of capital over the last 20 years with the help from their sponsors, the private banks. I think the RBA ought to be abolished. It is a cheer leader for those who already own the other half of government.

      • happy valleyMEMBER

        The RBA’s charter is just a front and they will never achieve their two main objectives: 1. inflation (include escalating prices of existing housing and it will be blown out of the water, but “policy evil” John Howard saw it stripped out in the early 2000s); and 2. reduced unemployment.

        Their real objectives are minimal interest rates/NIRP, propping up (un)questionably strong banks and goosing housing prices to the moon. Nothing else matters.

  3. There is no way they can capitulate at this point – would destroy their credibility and that would be a disaster for markets. They need to go all-in to signal they’re truly not going to flinch. Joye’s spot on, this is a whatever-it-takes moment.

  4. MOAR = HIGHER INFLATION = HIGHER INTEREST RATES

    everyone can spin what ever concoction they want

    CENTRALS ARE TRAPPED

    • happy valleyMEMBER

      Nah, like Kamikaze Kuroda of the BOJ, Powell and Lowe will buy every bond there is to be had, to cover their self-created debacles?

      • You watch HV
        Watch how high inflation gets over the next 6 months
        The Aussie 10 year touched 1.95 will pull back 1.20/30 but 10 year will be above 3% mid year or just after
        FED and RBA will tighten mid year
        Home loan rates will be rising June July AUG
        Inflation is here to stay longer term
        Interest rates are going much higher over next few years

        • happy valleyMEMBER

          If Lowe and mates at the RBA were to shoot themselves in the foot, that would be a sight to celebrate.