Important signal! After Canada, the RBA is also ready to taper?

At the opening of the market on Thursday, Australia's 2-year bond yield surged from 25bp to 50bp, well above the 0.1% target rate previously promised by the RBA.

Lenovo's 3-year bond climbed to an all-time high the day before, and the prospect of economic recovery is getting clearer, and the market predicts that the RBA is preparing for the Taper.

<h2>The yield on the 2-year Treasury note doubled</h2>

The RBA has previously insisted that the benchmark policy rate will remain at 0.1% and will not raise interest rates until 2024, while a yield target of 0.1% is a core element of this commitment. RBA Governor Philip Lowe has also said he does not see conditions for a rate hike until 2024.

Ahead of Thursday's opening, the market expects the RBA to buy bonds maturing in April 2024 to curb the recent sharp rise in yields. However, the RBA did not buy the bond during its routine market operations, resulting in a further rise in yields.

Australia's 2-year yield doubled in minutes, rising from 25bp to 50bp, recording the biggest one-day increase since the collapse of Lehman Brothers.

Soaring yields will reshape the tail end of Australia's short-term Treasury yield curve and add fuel to the fire of U.S. and American bond yields, which are already in an upward trend. As of now, the US 2-year Treasury yield has broken through 50bp to an all-time high of 54.8bp.

<h2>The market is betting on an early rate hike</h2>

The successive sell-offs of government bonds are bound to trigger the market to bet on the central bank to raise interest rates in advance. Just a day before the 2-year yield soared, Australia's 3-year yield climbed to as high as 1.01%, the highest level since July 2019.

But at the end of the day, the expected rate hike is largely due to the growing prospect of an economic rebound.

A few days ago, the Australian Bureau of Statistics released data showing that the country's CPI in the third quarter increased by 3% year-on-year, basically the same as expected; the average CPI cut off in the third quarter increased by 2.1% year-on-year, exceeding market expectations.

In addition, the market expects high vaccination rates to accelerate the economic recovery. Australia currently has a vaccination rate of 74 per cent, well above the global average. The CBA also expects vaccination rates in Australia to reach 95%. Australia's two most populous states, New South Wales and Victoria, have also reopened.

Gareth Aird, an analyst at the Commonwealth Bank of Australia (CBA), said: "High vaccination rates drive economic growth, and if Australia's vaccination rate reaches 95%, it means that even if the new crown cannot be eliminated, the impact of the epidemic will be greatly reduced. ”

The CBA said that the economy will accelerate the recovery and inflation levels will also heat up further, so the central bank is expected to raise interest rates by 15 basis points next November and 25 basis points in December, compared with the previous forecast for May 2023.

<h2>Where will the interest rate decision go next week? </h2>

It is worth mentioning that at the same time as Australia released inflation data on Wednesday, the Bank of Canada, known as the hawkish "central mother", announced a monetary policy decision to keep the effective lower limit of the benchmark interest rate at 0.25%, completely end the QE volume of loose buying bonds, and advance the interest rate hike expectation to the second quarter of next year as early as the first.

The rationale for ending QE is given the progress made in the country's economic recovery. The policy statement said "strong" economic growth had recovered after a weak spring, with strong job growth in recent months significantly reducing the very uneven impact of the outbreak on workers.

Given that Australia is experiencing the same economic recovery trend, will the RBA also prepare for Taper?

According to a previous wall Street insight, Prashant Newhana, senior interest rate strategist at TD Securities in Singapore, said that if the RBA does not hold on to the target yield of 0.1% on the bonds due April 2024, it will announce an adjustment to the target yield at next week's meeting.

Apparently, the RBA did not hold on to that target.

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