Australia's RBA raises costs for bond bears in battle for yield control

SYDNEY: Australia's central bank is acting to make it more costly for speculators to short bonds that are key to policy stimulus as part of a push-back against market speculation about possible early hikes in interest rates.

The Reserve Bank of Australia (RBA) has doubled the fee it charges for lending out April 2023 and April 2024 Australian government bonds to 100 basis points, making it more costly for speculators to short those bonds.

Those particular bond lines are ones the RBA targets to maintain three-year yields at 0.1%, a policy known as yield curve control (YCC).

"The RBA has made those two bonds significantly more expensive to short for those who can't find the collateral elsewhere, and sends a powerful signal to repo market makers," said Robert Thompson, macro rates strategist at RBC Capital Markets.

The move comes after the central bank recently stepped up the amount of bonds it was buying to help restrain a sharp rise in long-term yields, part of a global rout in bond markets.

The RBA had initially charged around 20 basis points to lend out the bonds it holds, but lifted that to 50 basis points as speculators looked to borrow more paper to short.

As that speculative push gained power, the RBA this week decided to raise the fee to 100 basis points and announce the fact publicly on its electronic dealing pages.

Speculators have been shorting bonds as a wager the RBA might soften its commitment to the 0.1% yield target, or abandon it altogether. Markets have also been pricing in the chance of a rise in the cash rate as early as next year.

RBA Governor Philip Lowe responded on Thursday by bluntly rejecting such speculation, saying a rate rise was unlikely until 2024 at the earliest.

He also re-committed to the three-year yield target.

"We are not considering removing the target or changing the target from 10 basis points," Lowe said in a speech.