The RBA failed to tamp down higher borrowing costs through an aggressive $3 billion purchase of three-year government bonds in the secondary market on Thursday triple the amount it bought on Monday and the most since the bond market turbulence during the COVID-19 panic last March.
The RBA had been unsuccessful in dampening bond yields at the short and long end of the curve and the RBNZs move had made the RBAs task more difficult, said ANZ economist David Plank.
There is upward pressure on market interest rates and that will flow through into quite a bit more expensive borrowing rates for states and corporates for 10-year money compared to the start of the year.
Mortgage rates are not priced off the long-term, 10-year bond yields.
RBA governor Philip Lowe has said he doesnt expect the cash rate to rise until at least 2024, but the guidance is being challenged by bond traders.
The yield on the three-year government bond remained stubbornly elevated at 0.13 per cent – 3 basis points above the RBAs 0.10 per cent target.
The market barely moved on what should have been a pretty positive surprise, said Bill Bovingdon, ALTIUS Asset Managements chief investment officer.
I think they might need to intervene at the longer-end with more QE because otherwise this will have unhelpful spillover effects in the currency and start to impact on things like property trusts and a broader contagion into equities.
Moreover, the federal governments 10-year borrowing cost has jumped to 1.72 per cent a doubling of the yield since the RBA officially unveiled its QE program last November.
ANZs Mr Plank said the rise in global long-term yields was a good news story about the success of fiscal and monetary policy stimulus.
But there has been a lift in Aussie rates quite a bit higher than US yields and that means that there will be more buying of Australian bonds and push up the Australian dollar.
The market is confused about the RBAs messaging.
The Australian 10-year yield has jumped 0.31 of a percentage point (31 basis points) about the equivalent US Treasury rate, higher than the gap of 0.16 of a percentage point (16 basis points) when deputy governor Guy Debelle began signalling last September that QE was coming.
Soon after officially announcing an initial $100 billion QE program in November, the Australian long-term bond yield fell 0.07 of a percentage point (7 basis points) below the US Treasury.
The high iron ore price, which has surged to above $US175 a tonne – its highest level in a decade – has also contributed to upward pressure on the local exchange rate.
When the RBA announced to the market at 11:15am on Thursday that it would purchase $3 billion of three-year bonds, the yield on the April 2024 bond declined slightly from 0.13 per cent to 0.125 per cent. But yields soon after jumped as high as 0.14 per cent, before settling back at 0.13 per cent.
The RBA now owns $18.5 billion of the $33 billion April 2024 bond.
The market is pricing in a jump in rates, with the yield on the November 2024 bond blowing out to 0.36 of a percentage point (36 basis points).
A market participant said there was not huge selling of local government bonds in recent days, but there was not a lot of buying.
When there is less demand for bonds, bond prices fall and yields rise.