Forget 2024 – these traders are betting we could see one much sooner
The Reserve Bank’s first post-COVID-19 interest-rate hike could be pushed forward to late next year, interest-rate traders are wagering. The traders point to bullish economic sentiment linked to vaccines, as well as US President Joe Biden’s planned stimulus package of more than $2 trillion.
Bond investors now doubt that RBA Governor Philip Lowe will be able to stick to his intention to keep the cash rate at 0.1% until 2024 at the earliest, according to a report by The Australian Financial Review. Interest-rate futures indicate the first hike in the cash rate to 0.25% could happen in late 2022, with the RBA raising the rate to at least 0.5% by 2023.
Interest rates paid on government bonds have risen recently, prompting investors to warn of “extreme” and “disorderly” bond-market disturbances following a sell-off that caused large losses for some traders Monday.
“It really feels like a disorderly functioning in bond markets,” ALTIUS Asset Management chief investment officer Bill Bovingdon told AFR. “The lack of follow-through in RBA bond buying for its yield control curve has kind of spooked the market a bit.”
The jump in market interest rates was driven by the global rollout of COVID-19 vaccines, strong iron ore and copper prices, and the reopening of the economy from health restrictions, according to economists.
The planned US$1.9 trillion ($2.4 trillion) US stimulus package has also raised hopes of an expedited global economic recovery.
“The vaccinations are going better than thought and the US is about to do the biggest fiscal stimulus we’ve ever seen,” a Sydney-based market strategist told AFR. “The size of the Biden fiscal stimulus is kind of incredible, and it’s going to arrive around the same time they’re about to reopen the country and economy.”
Former US Treasury Secretary Larry Summers has said the stimulus is too big and risks causing a spike in inflation. Current Treasury Secretary Janet Yellen has dismissed that view, pointing to weakness in the US labour market and wages.
Prior to raising the cash rate, the RBA wants to see actual inflation sustainably hit 2% to 3% and wages growth to be substantially higher than it is currently. Lowe said earlier this month that the central bank doesn’t expect those conditions to be met “until 2024 at the earliest.”
Asked how realistic it was that interest rates wouldn’t rise until 2024, Lowe told AFR that it was his “best guess” but “not a pledge.”
The RBA bought about $1 billion worth of three-year government bonds on the secondary market Monday, about half what traders were anticipating.
“The RBA did less than the market expected on Monday, so are they serious about maintaining that line in the sand?” Bovindon said.