Via Bill Evans:
As is expected to be the case for a number of years the Reserve Bank Board kept both the targeted cash rate and the three year bond rate at 0.25% on hold at its Board meeting today.
The board confirmed its commitment that “it will do whatever is necessary to ensure bond markets remain functional and to achieve the yield target for three year AGS. The target for the three year AGS rate will remain in place until” progress is being made towards the goals for full employment and inflation”. With the spot targets of 4.5% and comfortably within the 2–3% target band respectively the Board clearly has a long journey ahead.
While the timing implied by “progress” is uncertain we expect that the bond rate policy will be gradually eased, firstly by increasing the target rate some time in 2022 and then eliminating the target altogether prior to lifting the overnight cash rate target. We expect that lift in the target cash rate will not occur before end 2023.
The Board has noted that the Bank has scaled back the size and frequency of bond purchases with around $50 billion having been purchased having announced the policy on March 19. At the April 4 meeting the Governor pointed out that the Bank had purchased $37 billion highlighting the considerable slowdown in purchases over the last month.
However, in April the Governor pointed out that purchases could be expected to be “smaller and less frequent” whereas today he has indicated the Bank is prepared to scale up purchases again”.
That theme of being prepared to support the markets has been further emphasised by his announcement that “the Bank has decided to broaden the range of eligible collateral for these operations (repurchase operations)”.
The eligible securities will now cover Australian dollar securities issued by non-bank corporations with an investment grade credit rating. For long term corporate debt securities the minimum criterion corresponds to an average credit rating of BBB-and for short term an average credit rating of A-3; previously the minimum requirements were AAA and A-1 respectively.
Other policies around, say, asset backed securities including residential mortgage backed securities; commercial mortgage backed securities; and securities backed by auto loans/leases are unchanged where the assets must still have an average credit rating of A-1 and AAA and must not have “particularly complex” structures, for example CDO’s.
Lowering the credit rating for assets which do not represent an active part of the Australian financial system and are therefore unlikely to have a significant impact on liquidity seems an unusual policy although the Bank’s actions are likely to support, to some degree, the domestic market for corporate bonds and, possibly, demand by offshore issuers.
As expected the Governor referred to the Bank’s baseline forecasts whereby the economy is expected to contract by 6% over 2020 but lift by 6% in 2021. These forecasts are in line with Westpac’s forecasts which were released on March 31 (–5% and 4% respectively) while we are also in agreement that the unemployment rate will peak at “around 10%” (9%) but will still hold above 7% by end 2021. (Westpac expects the rate to be above 6%).
The details behind these forecasts, including scenarios, will be released with the Statement on Monetary Policy on May 8.
Another first for the Australian bailout. At the AFR:
The move is aimed at improving trading conditions in the corporate bond market, meaning some holders will be able to access cash from the central bank without having to sell their bonds outright.
It is hoped this will bring the Australian corporate bond market – which shut in February, while secondary markets have remained severely challenged – closer toward reopening.
“We see this as being helpful for the corporate bond market in terms of narrower spreads, freeing up balance sheets, helping to open the door for issuers to come to market domestically,” Commonwealth Bank’s fixed income analysts said.
This market is small so I’m not sure what the urgency is.
Stocks (or houses) next?
