Bloomberg
(Bloomberg) -- Australia’s central bank found itself overwhelmed by the global reflation trade after it dived back into markets and discovered its biggest bond purchases in 11 months did little to hold down yields.The Reserve Bank of Australia will buy A$5 billion ($4 billion) of bonds, matching the record set March 20 when it first began quantitative easing. Today’s purchases include an unprecedented A$3 billion under a program to keep three-year yields near 0.1%, but that wasn’t sufficient to stop the rate hitting a two-month high of 0.141%. Ten-year yields are poised for the highest close since 2019, helping to pressure Treasuries and Japanese government bonds.Read More: Aussie Bonds Drop as YCC Disappointment Drives Stop-OutsA $9 trillion rescue mission by central banks to haul the global economy out of its coronavirus recession is being tested by rising bond yields and inflation bets that are threatening their ability to keep borrowing costs down. Jerome Powell this week signaled the Federal Reserve was nowhere close to pulling back on its support for the U.S. economy, even as he voiced expectations for a return to more normal, improved activity later this year.Ten-year Treasury yields are up 35 basis points this month to 1.41%, heading for the steepest spike since the November 2016 bond rout set off as President Donald Trump’s election victory spurred reflation trades. The intensifying global bond selloff is forcing a rising tally of money managers to scale back market exposures while Wall Street strategists pare back their bullish playbooks. Investment firms including BlackRock Inc.’s research arm and Aberdeen Standard Investments are retreating from government bonds.Australia’s three-year yield initially moved closer to the 0.10% target after the RBA announced Thursday it would buy securities maturing April 2023 and 2024, it then pushed higher to break 0.133% as of 1:30 p.m. in Sydney. The central bank ended a two-month hiatus in yield-control operations on Monday when it snapped up A$1 billion of notes. That also had little impact as investors increasingly doubt it will follow through on forward guidance to hold borrowing costs at current levels further into 2024.Skepticism has grown that the RBA will stick to its guidance amid a tide reflation trades across global interest rate markets. That’s been been highlighted by the unraveling of a popular trade based on selling April 2024 bonds and buying November 2024 notes in anticipation that the RBA target will shift to the later maturity debt.Read More: When Listening to the Central Bank Goes WrongPolicy makers are trying to push back against the rising tide of yields, from Fed speakers stressing they will look through short-term inflation spikes to European Central Bank President Christine Lagarde “closely monitoring” government debt yields. The Bank of Korea warned it’ll intervene in the market if borrowing costs jump and the Reserve Bank of India is deploying a range of tools in the face of a market revolt.New Zealand bonds joined the global rout on Thursday after the government there announced it will require the central bank to take account of house prices when it sets interest rates. That triggered a surge in the currency as investors bet the move will restrict policy makers’ scope to run loose monetary settings. Overnight index swap markets fully priced in a rate hike for mid-2022, after seeing around a 40% chance of one by then when the swaps traded Wednesday. Yields on the 10-year kiwi benchmark surged as much as 18 basis points -- the largest move since March -- to 1.8675%, the highest since 2019 on a closing basis.What Bloomberg Economics Says...“The RBA is pulling out the stops to counter a rise in bond yields, which have been swept up in a global updraft. In a surprisingly forceful move, it announced its largest purchase of Australian government bonds since it began the program in March.”-- James McIntyre, economistFor the full note, click here.Traders in Australia have been emboldened by a rapid rapid economic recovery, as the country suppresses Covid-19 and massive fiscal and monetary stimulus encourages households to spend and firms to hire. A further boost has come from the surging price of iron ore, Australia’s largest export, which crashed through $170 a ton this week and is closing in on a record.Policy makers’ whose recoveries are lagging, are showing increased concern. European Central Bank President Christine Lagarde said Monday she and colleagues are “closely monitoring” government debt yields.RBA Governor Philip Lowe himself is skeptical about any rapid recovery in inflation. He has noted that before the pandemic, when unemployment had a 4 in front of it in some Australian states, it still failed to generate the sort of wage gains that would be needed to return CPI sustainably to the RBA’s 2-3% target. Australia’s most recent annual inflation reading was just 0.9% and the jobless rate currently stands at 6.4%. The central bank is likely to keep policy settings where they are when it meets on Tuesday.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.