Traders Challenge to RBA Stance Undermined by Jobs Market Wobble

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(Bloomberg) — The Reserve Bank of Australia’s ultra dovish stance has some investors scenting an opportunity in the nation’s long-dated bonds, which they expect to benefit once rates traders scrap bets the central bank will hike rates three times within a year.

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Yields on Australia’s 10-year bonds have fallen more than 20 basis points this month as the RBA pushed back against rate-hike bets last week. The relief rally comes after a rout that took yields above 2% for the first time since early 2019.

Rates traders are challenging Governor Philip Lowe’s forward guidance that the cash rate will stay at a record low 0.1% until 2024. Emboldened by signs Australia’s vaccination program is spurring a rapid economic rebound, futures markets are pricing that the RBA will lift the cash rate to at least 0.75% within a year, outpacing the expected path for the Federal Reserve.

They maintained those bets Thursday even after a government report showed a surprise spike in unemployment in October.

“The RBA has been trying to tell us they will be behind other central banks in their hiking timetable, so market pricing should eventually move to reflect that,” said Chris Rands, co-portfolio manager of the Yarra Australian Bond fund. “The jobs numbers buy the central bank a little more time before we get to the 4% unemployment rate that they think is required for wages growth.”

The willingness of rates traders to keep betting on hikes underscores the impact of the RBA’s sudden decision to abandon defense of its yield curve control program at the end of October, when data on stronger inflation spurred a bond rout.

Thursday’s report showed the jobless rate advanced to 5.2%, from 4.6% in September and above economists’ forecast of 4.8%. Employment dropped by 46,300 roles, its third monthly decline, compared with economists’ estimate for a 50,000 increase.

Australia’s benchmark three-year bond yield briefly trimmed gains before trading up 15 basis points at 1.05%, as bonds sold off worldwide in the wake of Wednesday’s strong U.S. inflation data. Cash-rate futures for August 2022 were yielding 0.45%, up 5 basis points from Wednesday, signaling strong expectations for two RBA rate hikes by then.

“The way YCC was dropped really damaged the credibility of the RBA,” said JPMorgan Chase & Co. economist Ben Jarman. “That really opens it up for markets to price in data expectations rather than trust the central bank’s guidance.”

READ: Jobs Report Lands at Center of Debate on Rate Hikes

The tension between rate-hike bets and the RBA’s outlook can also be seen in the yield curve as bond bulls and bears staked out their claims. An initial curve steepening is now paring, with the spread between three- and 10-year bonds narrowing about 15 basis points since the RBA’s board meeting.

“In the wake of the market induced sell-off two weeks ago, our models flashed buy,” said Prashant Newnaha, an Asia-Pacific rates strategist at TD Securities in Singapore. “It’s too early to take those long positions off just yet, but we would be inclined to take profit on another 10-15 basis point rally in 10-year Australian government bonds.”

(Updates and recasts with market moves after jobs data release)

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