Bond Rebound Snaps as Australia CPI Prompts Half-Point Hike Bets

(Bloomberg) — Australian short-end bonds dropped to lead a reversal for global debt on Wednesday, after government data showed the hottest core inflation since 2009 spurred traders to bet the country’s central bank will make its largest interest-rate increase in two decades. 

Three-year Australian yields surged as much as 10 basis points to 2.75% after data showed trimmed mean inflation accelerated to 3.7%. The sell-off also came as five-year Treasury yields climbed six basis points, snapping a three-day slide, with signs China’s Covid outbreaks are stabilizing offering reassurance about the global growth outlook. 

That cemented expectations the Reserve Bank of Australia will join central banks around the globe who are aggressively tightening policy to rein in soaring inflation. Those moves have sent global bonds toward unprecedented losses, and even this week’s rebound was accompanied by concerns that extreme bearish positioning raised the potential for fresh waves of selling. 

“The bond market reaction to today’s data has been a wild ride,” Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada, wrote in a report after Aussie CPI. “Pricing for the cash rate at the May meeting has gone from 0.16% to 0.27%” as the market prices in the potential for an outsized move, she wrote. 

Australia’s Hot Inflation Builds Case for Election Rate Hike

Swaps traders are pricing in a 1% RBA cash rate by July, which would mean that they boost the benchmark by more than their usual 25 basis points at one of the coming three meetings. The Australian central bank hasn’t been that aggressive in tightening policy since it hiked by 50 basis points in February 2020.

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