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BlackRock Says World of Panic Can Send Australian Yields Negative

Australia may be the next market to see negative yields, according to BlackRock

BlackRock Says World of Panic Can Send Australian Yields Negative
Australian one hundred dollar and fifty dollar banknotes are arranged for a photograph in Sydney, Australia. (Photographer: Brendon Thorne/Bloomberg)

(Bloomberg) --

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?”

BlackRock Says World of Panic Can Send Australian Yields Negative

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.

The Reserve Bank of Australia cut benchmark rates on Tuesday by a quarter percentage point to a record low 0.50%, and said it stands ready to ease further. The Bank of Japan conducted an unscheduled debt buying operation for a second day.

Together, they’ve raised expectations for similar policy response from other major central banks.

“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.”

Markets Are Pricing a Rush of Rate Cuts, But Nothing Like 2008

Even as Vardy questions the effectiveness of more easing in Australia, he expects the RBA to cut 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 dropped as much as 17 basis points to a record low of 0.33% on Monday. They were little changed on Tuesday at 0.44%.

“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.”

Below are other edited comments:

Quantitative Easing

It’s not credible to say that policy easing can get us out of the problems. Fiscal policy is frankly the only answer. I would hope to see fiscal support before you get to QE.

There are signs the government has realized that they probably need to step in sooner, particularly in sectors around education, tourism.

The QE trade is restricted to Australian government bonds only, most likely at the long-end of the curve, say around 10-years. The idea for the RBA will be to absolutely flatten the curve.

Aussie at 60 Cents

In a world of QE, in a world of really low bond yields, the Aussie is probably not going to be the most attractive destination for a lot of people. Sixty cents is in the target range for us, and then clearly if things escalate, it will be through 60 U.S. cents.

The Australian dollar is down more than 6% against the dollar this year, and closed at 65.37 U.S. cents on Monday.

‘U’ Shaped Recovery

It’s going to be a potentially long drawn-out U-shaped recovery for the world economy. It’s very much looking like inflation certainly won’t be troublesome for some time if we get this hit to global growth.

To contact the reporter on this story: Ruth Carson in Singapore at rliew6@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Cormac Mullen

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