Analysis: RBA Manages Curve Flattening; May Aim For More, 10-yr?

• Published on
• 24 Mar 2020, 09:29 AM

By Sophia Rodrigues

The Reserve Bank of Australia has managed to flatten the yield curve in the short to medium-end after two days of government bond-buying but the aim to achieve a further flattening might see them doing more purchases this week and possibly extend the buying to 10-year bonds.

After announcing bond-buying under the 3-year yield target policy last week, the RBA has so far conducted auctions on two days, buying bonds with remaining maturity of one to eight years. The RBA’s policy is to target 0.25% on three-year government bonds and achieve a flatter risk-free yield curve.

The first auction on Friday for a total A$5 billion saw a strong demand for 3-year bonds, resulting in a cut-off yield of 0.20% and purchase of A$658 million of bonds. The weighted average was 0.2719%, indicating there was a wide range of bids.

Of the remaining three bonds, the cut-off yield on July 2022 bond was 0.2850%, on the November 2027 bond it was 0.9550% and on the May 2028 bond it was 0.9700%.

The higher than expected cut-off yield on the 2027 and 2028 bond saw the RBA return to the market again on Monday, announcing an intention to buy bonds of similar terms.

As expected, the cut-off yield on Monday on those two bonds was significantly lower than Friday, and the difference between the cut-off and weighted average was a maximum 1.3bp suggesting market expectations had moved closer to the RBA’s target.

The cut-off yield on May and December 2021 was set at identical 0.2525%, while the April 2027 was set at 0.5550% and the November 2028 at 0.7925%.

However, there may still be scope for a further flattening in the curve, especially yields on 2027 and 2028 bonds. So, it is likely the RBA may announce another auction this week and possibly include a 10-year government bond.

--Contact: sophia@centralbankintel.com