Australian central bank boosts bond purchases after skyrocketing borrowing costs

Australia’s central bank doubled the amount of its regular bond purchases on Monday, which analysts said will have broad implications as policymakers contemplate their response to a global rise in borrowing costs.

The Reserve Bank of Australia’s move pushed the country’s 10-year bond yield down nearly 0.25 percentage points to 1.67%, marking the biggest price increase since the market turmoil in last march. It had climbed to 1.928 percent as the country emerged as one of the top focal points for global bond selling last week.

The RBA’s purchase of AU $ 4 billion ($ 3.1 billion) of long-term bonds was the second recent intervention after the bank launched an unplanned AU $ 3 billion purchase on Friday of short-term bonds.

“RBA actions could influence market expectations for other central bank policies if the rally in yields does not line up with economic fundamentals,” said Prashant Newnaha, senior rate strategist for the Asia-Pacific at TD Securities. “We believe today’s decision could have implications around the world.”

Government borrowing costs jumped last week, with the 10-year US Treasury yield hitting its highest in a year at 1.6 percent. The bond selloff began as investors feared that the post-pandemic economic recovery, supported by a substantial stimulus, could lead to higher inflation – eroding the value of interest payments on bonds.

The increase in yields was seen as a test of central banks’ commitment to keeping borrowing costs low until the economic recovery is well underway. Other central banks could come under pressure to follow the RBA, either through stronger messages or by stimulating their asset purchases.

Philip Lane, Chief Economist of the European Central BankThursday said the bank “is closely monitoring the development of longer-term nominal bond yields.” Analysts will look at the weekly figures from the ECB’s Emergency Pandemic Purchase Program, released later Monday, which will provide the first indication of whether the bank has changed its asset purchases in response to the sale of last week.

“A concerted effort by the European Central Bank to lower rates is clear. As this had little impact on financial conditions, the focus is now on action, ”ING analysts said on Friday. The yield on German 10-year benchmark bonds stood at around minus 0.3% on Monday, after jumping above minus 0.2% last week.

As part of its pandemic € 1.85 billion bond buying program, the ECB has the ability to stimulate buying in response to volatile moves over the past week. Lane said the bank “will buy flexibly based on market conditions and with a view to avoiding tighter funding conditions.”

In the United States, Federal Reserve Chairman Jay Powell downplayed inflation fears testimony to Congress last week and highlighted the economic uncertainty by pointing out that the central bank had no plans for an early tightening of monetary policy. “The economic recovery remains uneven and far from complete, and the way forward is very uncertain,” he said.

ANZ Research rates strategist Jack Chambers said the RBA faced a “more acute” need for action than other central banks, given its three-year yield control policy and impact of rates on its currency.

Chambers said the larger purchases served in part to show the market that the bank was willing to take action if necessary. “It’s definitely a signal,” he said. “This shows the willingness of central banks to intervene if necessary if they are worried about the speed of the rate liquidation.”

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