(Bloomberg) -- Australia's short-end sovereign bonds erased losses after the nation's central bank damped bets for an aggressive tightening.
Yields on three-year debt dropped five basis points to 0.96%, giving up gains of as much as seven basis points, after the Reserve Bank of Australia said it will be patient in deciding when to raise the cash rate from 0.1%.
The yield moves follow a week of heightened volatility for Australian bonds as they became the latest battleground for traders pushing central banks to accelerate the timeline for tightening amid a quickening in inflation worldwide. The RBA on Tuesday scrapped its yield target on the three-year note in a nod to traders who have been selling the bond in recent weeks.
“The scrapping of the YCC target on the basis of economic improvement but the pushback on rate hikes is likely to dampen front-end yields since this manages to tame the more aggressive 2022 rate hike bets,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “As a corollary, this may also temper AUD bulls.”
Yields jumped across the curve Friday as liquidity evaporated in an already thinly traded market after the RBA refused to defend the yield on its target bond, the April 2024 note. That also ratcheted up expectations the program would be scrapped. The selloff saw Australia's 10-year yield trade at a premium of more than 50 basis points over 10-year Treasuries, the widest in four years.
The Australian selloff mirrored New Zealand's last month, after the smaller nation recorded its strongest inflation in a decade and traders bet consumer-cost pressures are getting entrenched. The same debate is echoing across major markets, with yields from Treasuries to gilts all climbing on expectations central banks will need to turn hawkish.
Read More: Inflation Drags Down Aussie, Kiwi Bonds Most in Developed World
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