Westpac: RBA Pricing Has Shifted Too Far Too Soon

Westpac note that the catalysts for the market repricing re: RBA policy have "been as much globally-based, with inflation fears and QE tapering expectations dominating, as domestic. The problem of course, is that RBA Governor Lowe, just over a month ago, when pricing was very different, reflected on the then-prevailing tightening timetable with a tone of incredulity. So one wonders what he thinks about the even more aggressive pricing."

• "For most of last week, before the RBA bought A$1bn of the YCC target bond, there was much discussion as to whether we were entering a new policy regime. That turned out to be a step too far, with Friday's intervention sufficient to push ACGB April 2024 back to more acceptable levels versus the 0.10% target. Westpac does not think the RBA will walk away from this target before they actually raise the cash rate. That is as much for signalling purposes as it is for the potential balance sheet difficulties that a significantly higher bond rate would incur."
• "Looking further out along the curve, 10-Year bond yields are now lower than the implied cash rate in 2024. That is an unusual situation and has only happened previously when outright yields were much higher and cash rates were expected to fall. Does that mean the front end has gone too far, or that 10-Year yields should rise further? A bit of both in our view."