RPT-ANALYSIS-Bond traders testing Australia's cenbank over rate hike timing

(Repeats story published late on Friday with no changes to text)

* Market pricing wildly at odds with RBA rhetoric

* Traders see hikes in 2022; RBA no sooner than 2024

* RBA intervenes in bond mkt, but doubts remain – traders

SINGAPORE, Oct 22 (Reuters) – Bond traders are heading for a showdown with Australia’s central bank, as surging yields and inflation expectations defy policymakers’ insistence that interest rates can hold at record lows for years.

On Friday, the Reserve Bank of Australia (RBA) spent A$1 billion ($750 million) buying in the bond market to try and calm investors who had been testing its resolve to anchor near-term rates at crisis levels.

Yet a yawning gap remains between policymakers – who have repeatedly said they do not expect hikes before 2024 – and the market, which has priced 100 basis points of hikes before the end of 2023, beginning in the second half of 2022.

It is among the starkest divergences in the world and has set the scene for a bumpy resolution that could flow through to credit markets and even housing costs.

Already, a global sell-off in bonds this month has been particularly brutal Down Under as speculators positioned in line with the central bank’s dovish rhetoric were wiped out as three-year bond futures saw their steepest falls in about a decade.

“Interest rates globally are moving higher and at some point the RBA may need to back away from their firm commitment on low rates for an extended period,” said Mark Elworthy, head of Australia and New Zealand rates trading at Bank of America Securities in Sydney.

“It’s been a little bit of a perfect storm,” he said of trade in recent weeks as rising energy prices and inflation seemed to shatter faith in the central bank’s forecasts.

“People are cutting out of their positions where they’ve been long and wrong … a lot of people are running for a small door and prices get pushed to much more extreme levels than they would otherwise.”

Government bond futures are traded more heavily than cash bonds, and Australian three-year bond futures touched a two-year low this week and 10-year futures slid to a seven-month trough.

RBA WON THIS ROUND

The RBA’s intervention capped selling pressure on Friday and dragged the yield on the April 2024 government bond , which it has targeted to signal its rates guidance, down from around 0.19% to about 0.12%.

However, that still leaves it a snip above the RBA’s 0.1% target and Elworthy and other market participants do not think the bank’s move will be enough to dispel investors’ doubts.

The bank’s most recent forecasts show it thinks growth in its preferred inflation measure can hold at 1.75%, against analysts’ forecasts, for example from ANZ, that data due on Wednesday might show it hitting 1.8%.

“The RBA has won this round,” said Nomura rates strategist Andrew Ticehurst, but another looms with the Wednesday data and then RBA’s meeting on Nov. 2.

“The November’s meeting’s extremely important for the market and it’s quite possible that we see it weaken the (yield) target,” he said.

RBA Governor Philip Lowe said during an online conference on Friday that the bank was closely watching inflationary pressures, but reiterated that he did not think it would be sustained unless it led to sustainable higher wages growth.

A month ago Lowe said: “I find it difficult to understand why rate rises are being priced in next year or early 2023” because wage growth has been sluggish and that Australia’s wage and inflation experience differs from other countries’.

Lowe’s dovishness is contrasted across the Tasman Sea, where the Reserve Bank of New Zealand hiked interest rates for the first time in seven years this month. After a red-hot inflation reading on Monday, it is expected to keep going.

“The market was kind of attuned to the idea that the RBA will be the buyer of last resort at all times, said Stephen Mackie, director of insitutional fixed income at broker FIIG in Brisbane.

“Now the market is sort of thinking that if our cousins over the ditch can lift rates and respond to higher inflation this is going to translate to reassessment from the RBA.

“How long can the RBA say that they’re not going to move rates until 2024 when the rest of the world is moving on past COVID?” ($1 = 1.3378 Australian dollars)

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