Australia’s central bank doubled the size of its regular bond purchases on Monday in a move that analysts say will have broad implications as policymakers consider their response to a global jump in borrowing costs.
The decision by the Reserve Bank of Australia added fuel to a rebound rally that sent the country’s 10-year bond yield tumbling almost 0.25 percentage points to 1.67 per cent. It had soared as high as 1.928 per cent as the country became one of the main focal points of last week’s worldwide bond sell-off.
The RBA’s purchases of A$4bn ($3.1bn) in long-term bonds was the second recent intervention after the bank on Friday launched an unscheduled purchase of A$3bn in short-term bonds.
“The actions of the RBA could influence market expectations of policies by other central banks if the back-up in yields is not consistent with economic fundamentals,” said Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities. “We believe that today’s decision could have implications across the globe.”
Government borrowing costs surged last week, with the 10-year US Treasury yield touching its highest level in a year at 1.6 per cent. The bond sell-off began as investors feared that the economic recovery from the pandemic, backed by substantial stimulus, would lead to rising inflation — which erodes the value of the interest payments on bonds.
The increase in yields has been seen as a test of central banks’ commitment to keep borrowing costs low until the economic recovery is well under way. Other central banks may come under pressure to follow the RBA, either through more forceful messaging or by boosting their asset purchases.
European Central Bank chief economist Philip Lane on Thursday said the bank was “closely monitoring the evolution of longer-term nominal bond yields”. The central bank bought a smaller amount of bonds than usual last week despite several of its top policymakers expressing concern about the sell-off in debt markets that has pushed up borrowing costs in Europe.
The ECB bought €12bn of bonds under its pandemic emergency purchase programme (PEPP) in the week to last Wednesday — down from €17.3bn the previous week and below the €18.1bn weekly average since the programme started last March, data released on Monday showed.
The fall in bond purchases shows the ECB’s actions have so far failed to match its words. But there was little market reaction and the ECB said the decline was largely due to higher than normal redemptions and warned against reading too much into one week of data.
François Villeroy de Galhau, the French central bank governor and member of the ECB governing council, said on Monday that “we can and must react against” the recent rise in bond yields. The ECB has capacity in its €1.85tn pandemic bond-buying programme to boost purchases in response to volatile moves last week.
In the US, Federal Reserve chairman Jay Powell played down inflation fears in testimony to Congress last week and pointed to economic uncertainty as he stressed that the central bank had no plans for early tightening of monetary policy. “The economic recovery remains uneven and far from complete, and the path ahead is highly uncertain,” he added.
“By far the easiest action for the Fed to pursue is to serve notice that [it is] monitoring events in the bond market, and its spillover on to other asset markets closely,” said Alan Ruskin, chief international strategist at Deutsche Bank, adding that a shift in messaging is the most likely response from the Fed.
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 the impact of rates on its currency.
Chambers said the larger purchases in part served to show the market that the bank was willing to take action if required. “It’s definitely a signal,” he said. “It shows the willingness of central banks if needed to step in if they are concerned about the velocity of the sell-off in rates.”
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