MNI STATE OF PLAY: RBA Ponders Rising Bond Yields

The Reserve Bank of Australia will be focused on last week's sharp jump in bond yields when it meets Tuesday, as sagging debt markets forced the central bank to purchase AUD5 billion across Feb 25 and 26 in an attempt to defend the yield target on 3-year government bonds.

Since mid-2020, the RBA has a target of 0.10% on 3-year debt, but the recent rout in global bond markets saw the yield spike to a high as 0.141% at one point, before falling back as the central bank stepped in, although still sitting well above the target level as of Friday's close.

While the bank is expected to leave benchmark interest rates unchanged at the historic low of 0.1%, policymakers could offer enhanced forward guidance on rates, which it has said are likely to stay at the current level until early 2024.

This might help in an attempt to talk down the value of the Australian dollar, which briefly broke through the US80 cent barrier last week to a three-year high.

The RBA believes the AUD is 5% lower than it would have been without its easing policies, but the currency was trading as low as US58 cents as the pandemic hit last March and is now at US79 cents.

In term of its bond buying program, the RBA's yield targeting is aimed at three year bonds and is open ended, while longer dated bonds are being purchased under a program of Quantitative Easing.

NO TAPER

The RBA headed off any thoughts it would taper that program by announcing another AUD100 billion in QE at its March meeting, and those purchases are due to expire in September.

With yields rising globally and taking bonds in an unplanned direction the RBA could be tempted to tinker with its program of QE to send another signal to the markets, despite an outlook that continues to defy the worst expectations of a year ago and will likely be underlined by a strong Q4 reading when data is published Wednesday.