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BlackRock Says World of Panic Can Send Australian Yields Negative

Tuesday 3rd March 2020

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Australia may be the next market to see negative yields as the fallout from the coronavirus drives an unstoppable bond frenzy, according to BlackRock Inc.

Prolonged equity losses and monetary easing by the Reserve Bank of Australia can send the nation’s 10-year bond yield into negative terrain for the first time, according to Craig Vardy, head of fixed income for Australia at the world’s biggest money manager.

“Right at the moment you’d be absolutely crazy to fight markets, I think, and particularly bond markets,”said Vardy. “In a world of epidemic, in a world of panic, flight to safety, where are you still going to make money?”

Vardy joins an increasing number of money managers who see the last major standouts against negative rates giving in as the impact of the coronavirus sweeps through the global economy. Bond yields from the U.S. to Australia have dropped to record lows after the Federal Reserve said Friday that it’s ready to ease if the American economy needs support.

That’s raised expectations for a coordinated policy response. The Reserve Bank of Australia could set the tone on Tuesday as it is the first Group-of-10 central bank to meet this month.

“What you’ll probably see is very much central bankers will be coordinating around the globe, it’s likely we’ll see a Fed cut as well this month. Sitting back and doing nothing right now in this environment is probably not the right answer.”

Even as Vardy questions the effectiveness of more easing in Australia, with policy rates already at a record low of 0.75%, he expects the RBA to cut on Tuesday and once more in May or June.

Quantitative easing may then be implemented in the fourth quarter, said Vardy, who has been long 10-year Aussie government bonds and U.S. Treasuries since mid-February.

Yields on Australia’s three-year bond yield dropped as much as 17 basis points to a record low of 0.33% on Monday. Australian stocks sank to a nine-month low.

“If it gets to the point where you have got serious concerns in the equity market in particular and risk assets, then what’s to stop bond yields getting negative here?” Sydney-based Vardy said. “Nothing.”


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