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Australia’s Bond Buying Plans and What Markets See Coming Next

Tuesday 17th March 2020

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As Australia’s central bank gears up to unleash quantitative easing as early as Thursday, investors are scrambling to map out further measures that may accompany its debt purchases.

The nation’s 10-year sovereign yield dropped as much as 16 basis points after the Reserve Bank of Australia flagged it was prepared to buy government bonds to support the coronavirus-hit economy.

Some market watchers expect the measures will cover more than just traditional bonds. Others think yield-curve targeting will be the RBA’s preferred tool.

Here is a selection of their views:

Su-Lin Ong, head of economic and fixed-income strategy at Royal Bank of Canada:

“We expect measures beyond bond buying tailored to the current crisis.”

“We are keeping an eye out for additional measures in short-end funding space to be announced by the RBA.”

“The repo market is likely adequately supplied with liquidity at this point, but to assist short-term bank and corporate funding we could also see a facility like that introduced by the Bank of Canada to purchase bank bills.”

“Negative bond yields are more a risk in the U.S. but I wouldn’t rule them out completely in Australia. The RBA could set a target of say 0.35% for the 10-year part of the curve as part of its QE plans.”

“As an investor right now you could hold cash, or hold government bonds because you know QE is coming. It could happen on Thursday. I’m surprised the RBA didn’t follow the RBNZ with an emergency rate cut.”

The RBA would “most likely target the mid-part of the curve, around three-to-five years” for yield-curve control.

Nomura recommends buying the April 2024 Australian government bond. “We believe the RBA could nominate a target of around 0.25 to 0.40% for this part of the curve, and set an initial target for this position at around 0.40%.”

Marcel Thieliant, senior Australia and New Zealand economist at Capital Economics:

“We expect the RBA to launch full-blown quantitative easing on Thursday.”

“Our baseline assumption is that the Bank will pledge to buy $60 billion of government bonds per annum, which is equivalent to 10% of the outstanding stock.”

“We want to know the duration of the bonds being bought (likely three-five year maturities), the amount (probably around $60 billion per annum).”

“It should come with rock-solid forward guidance – cash is king, and there’s going to be plenty of it around, hence it’s not hard to see why the Aussie three-year Treasury yield has fallen hard, and why we are seeing even better sellers of AUD.”


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