It is financial market lore that governments and central banks don’t argue with the bond market — the self-appointed guardians of fiscal purity and price stability.
Oftentimes, however, bond traders are more like highly paid sheep.
And one of their failings is an ability to read simple English.
Three weeks ago, somewhere in the US, Europe or Australia, a screen jockey got the idea that high levels of spending and market operations by governments and central banks meant higher inflation — and thus higher government bond yields.
Sign up for a FREE 21-day trial and get Crikey straight to your inbox
Result: the price of government debt, especially longer-term debt, began rising. The size of the Biden stimulus package in the US — which had some neoliberal pundits like Lawrence Summers warning about inflation — has encouraged them.
The Reserve Bank (RBA) here is committed to spending $200 billion to keep the yield on 10-year bonds as low as possible — with flow-through benefits for pushing the value of the Australian dollar down. This is in addition to the yield control buying that the RBA is conducting in three-year bonds to keep the interest rate at 0.10% (i.e. steady with the short-term cash rate).
Last Friday, the RBA bought $3 billion worth of three-years bonds after running its normal Thursday secondary market purchases for the same amount. Those Friday purchases were forced on the bank after the three-year yield rose above 0.10% after Thursday’s purchases. Ten-year bond yields had also risen sharply.
The RBA’s second round of purchases helped suppress the three-year yield, but the yield on 10-year bonds topped out at 1.9% — for no apparent reason — and ended the week around 1.83%, up 48 points or 0.48%. A very large move in a week.
The Australian dollar soared last week as well — rising to a three-year peak of 80.08 US cents on Thursday. It then eased, and despite Friday’s rise in 10- year bond yields continued dropping in offshore trading on Friday night. It was around 77.4 US cents overnight Monday.
Then, yesterday, the RBA waded into the market and bought $4 billion worth of 10-year bonds — a move that saw the 10- year bond yield fall 25 points to around 1.65% by the close on Monday.
So the RBA spent $10 billion in bond buying in three sessions, of which $7 billion was aimed at bashing a key interest rate lower — and all because a bunch of screen jockeys managing bond portfolios claim to be worried about inflation.
They have again ignored the salient point that underlying inflation has not topped 2% for the past five years or more — and it’s a similar situation in the US.
The screen jockeys think the Fed and the RBA will be forced to push up rates earlier than expected — in Australia some reckon it will be late next year — and cite rising house prices as a big driver, as well as rising inflation. The RBA says not before 2024. The Fed has a similar stance, without nominating a target year.
Both central banks are clear that they want to see a rise in inflation, but it will be a struggle to get it sustainably back to target levels — especially given the failure to hit inflation targets in the years before the pandemic.
The Fed even adopted a policy last August of allowing inflation to run “moderately” above its 2% goal “for some time” following periods when it has run below that objective. But there are quite a few people in bond and currency markets — and among the commentariat — who seemingly can’t read and struggle to grasp the meaning of the RBA and Fed policy stances on inflation, jobs and wages.
Bond markets need increased volatility to trade bonds. There are too few opportunities to trade and make money when rates are low and stable. Confusion and conflict are needed instead.