Australia's central bank commits to keep 3-year yields low amid bond rout

Australia's central bank on Tuesday affirmed its pledge to keep interest rates at historic lows as policymakers battle to stop surging bond yields disrupting the country's surprisingly strong economic recovery.

Concluding its March board meeting, the Reserve Bank of Australia (RBA) kept rates at 0.1 per cent and committed to maintaining its "highly supportive monetary conditions" until its employment and inflation goals are met.

Global bond markets have sold off heavily in recent days on speculation the massive monetary stimulus will soon end as economies emerge from the pandemic-induced recession.

On Tuesday, Governor Philip Lowe said he did not expect to meet the RBA's inflation and employment objectives until 2024, signalling the cash rate will stay at 0.1 per cent for a long time to come.

Despite that commitment, Australian bonds sold off with the 10-year futures contract implying an yield of 1.72 per cent compared with 1.66 per cent on Monday.

The local dollar, which has traded near a three-year high, pared some of its losses and was at $0.7762, up from as low as $0.7737 earlier in the day.

Economists at the Commonwealth Bank of Australia (CBA) expect the RBA to abandon its three-year yield curve control (YCC) target in the second-half of this year while retaining its flexibility to purchase bonds at the longer-end of the curve.

"We continue to believe that the ongoing improvement in the domestic economic data will ultimately force the RBA's hand to do something about YCC later this year," said CBA economist Gareth Aird.

So far, Australia's success in containing the coronavirus has allowed consumer spending to roar back from lockdown-induced recession.

Figures due on Wednesday are forecast to show gross domestic product (GDP) grew 2.5 per cent in the December quarter, on top of a 3.3 per cent jump the previous quarter.

"More specifically, we think that the RBA will exit YCC in second half 2021," Aird added.

MORE QE?

Economists generally expect the RBA to extend its quantitative easing programme targeting longer-dated bonds by another A$100 billion to help achieve its goals.

On Tuesday, Lowe repeated the RBA was committed to the three-year yield target at 0.1 per cent while adding that it would purchase more bonds as needed to support that target.

The remarks follow a global bond market rout last week that saw Australian yields spike to two-year peaks in just a couple of sessions with three-year yields hitting 0.188 per cent.

The bank responded with an aggressive A$3 billion ($2.33 billion) bond buying offer last Friday, and followed up with another A$4 billion in Monday.

"The market is on notice," ANZ economists said, underlining the RBA's preparedness to buy more bonds if needed.

"The bigger issue for the bond market is the continuation of much better-than-expected data. These support a continued steep curve."

Across the Tasman Sea, New Zealand's central bank also emphasised on Tuesday it was in no hurry to tighten policy, seeking to temper market speculation of a quicker end to stimulus.