Australia at the Brink of QE Has Markets Primed for These Moves

(Bloomberg) --

Investors are bracing for everything from yield-curve control to massive purchases of government bonds ahead of a policy announcement on Thursday by Australia’s central bank.

The Reserve Bank of Australia may announce plans to buy as much as A$60 billion ($37 billion) of sovereign debt a year, according to Capital Economics. Nomura Holdings Inc. expects the RBA to target the yields for three-to-five year bonds while AMP Capital Investors Ltd. says the central bank could seek to control the 10-year debt as part of measures to maintain stability in markets.

The sharp drop in 10-year yields on Monday was only a small taste of what’s likely come when the RBA does reveal its plans. The benchmark has swung wildly in March and yields are now almost double the record low set earlier this month, leaving them vulnerable to a sharp fall.

Here is a selection of views on what the RBA may have in store for investors:

Minimum Purchases

Carl Ang, strategist at Citigroup Inc:

“The RBA may consider signaling a minimum monthly purchase amount of ACGBs with the flexibility to increase purchases, particularly if interest rates were to cross a pre-determined threshold.”

“So far the RBA’s focus has been on short-tenor yields given the pass-through to floating mortgage rates, but this may have to be broadened to medium and longer tenors in order to create more fiscal space for Federal and state governments.”

Beyond Bonds

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.”

Yield Targeting

Shane Oliver, head of investment strategy at AMP Capital Investors Ltd.:

“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.”

Middle of Curve

Andrew Ticehurst, rate strategist at Nomura Holdings Inc.:

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%.”

QE Thursday

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.”

Duration Question

Chris Weston, head of research at Pepperstone Group:

“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.”

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, Brett Miller

©2020 Bloomberg L.P.