Evans: RBA begins buying corporate bonds

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?

David Llewellyn-Smith
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    • Spot on 303
      Experience runs an expensive school but fools will learn in no other.
      Hyperinflation early next year.

  1. J BauerMEMBER

    Surely there are better things to spend $50 billion on. Governments care more about corporations than citizens.

    • Surely the ‘confidence’ in the currency is more to do with ability to pay debts and thus like a household its about cashflow and it being positive in current account terms. As you suggest impliedly, its counter to the stability plank in RBA mandate.

  2. We are all socialists now. The world has flipped on its head.
    In Germany the courts have halted the ECB’s corporate bond buying program saying that its illegal!

      • Agree but the US and japan don’t care and we let their multi nationals do business in our country. What are you left to do? Everyone is turning japanese and no one is caring to think what happens when CB,s own everything

  3. Reading between the lines this is probably the concession for super funds that wanted direct liquidity from the rba. It’s small but something I guess and only really provides “temporary” liquidity.

    It’s hard to fathom any other reason for this policy given the size of the corporate bond market. It also isn’t limited to Australian corporations indicating this is either an investor or intermediary led policy change.

  4. all the hopes and dreams of MB readers are turned to dust

    RBA buying mortgages before they go lower than A1 (and if they do they will just change their criteria)

    So mortgage repayments now basically never need to be made, neither interest nor principle
    Its off the banks hands and on to a limitless balance sheet

    I knew it was coming, but its still very shocking to actually see it happen

    Now is the time to buy a house?
    There might still be some sellers who don’t understand the implications and will sell for a “discount”

    Certainly there is no point keeping cash

    • A few noughts added to the RBA inflation target, and they will get this one and probably suppass it with ease. Gold and infaltion to the moon.

    • Well, yes and no

      Do you think this kind of stuff filters to sellers (and buyers) en masse? Or to the agents who are doing appraisals?

      Is it a bad time to sell? Depends on your circumstances and price. I was delighted to sell now, irrespective of what is going on, as we’ve had this plan since March 2019.

      Is it a bad time to buy? Again, circumstances. For me, it’s not. For others, it may be.

      Still not seeing a crash, but price discovery is happening via private treaty transactions. I would argue that an agreement between buyer and seller on price is price discovery.

      Disc: not an economist.

      • I think you’ll find Swampy that there are a large number of people who have been waiting for the better part of 10 years or more for australian house prices to finally collapse, so they can swoop in and buy the house that they deserve

        They were so, so close but it has been predictably snatched away from them (again)

    • Coming
      You are going to be very disappointed
      The deflation is too powerful this time
      Nothing can stop this global debt deleveraging

    • Default criteria and losses are defined by APRA, you need to see those definitions change before this is true. This just gives banks a bit of breathing room, they still need to make the repayments on those bonds issued.

  5. Have they changed the insolvency laws yet?

    Why the need to make a profit when you can just issue bonds to the magical bank that buys them with magical new money and you can stay in business and continue to pay yourself and board handsomely. The shareholders are mostly super funds who take a handsome regular clip and the ultimate risk holders at the end of it it with no upside are the dumb sucker working Aussies (Mums and Dads, perhaps?) that are forced to pay a percentage of their salary along with regular fees and insurance premiums into the whole corrupt fake system.

    The ASX is largely a steaming pile of worthless turrd.

  6. happy valleyMEMBER

    Tell the RBA to buy the big 4 banks and underwrite their dud loan losses (because after all, our banks are unquestionably strong) and then the banks can keep paying their fully franked dividends to excess franking credit “refund” leaners, who are after all, all whom SFM cares about apart from his clappy clappy mates and big corporate mates?

  7. Stocks or houses – make me think of the wonderful Lacy Hunt podcast I have relistened to several times now. Worries me more each time I listen to it. If so – short the AUD to banana and more

  8. The RBA buying junk sub-prime securities to keep interest rates low, save banks and keep printing money – AU indeed officially is now a banana republic. That will send the AUD down, and indeed get rid of your cash while you can.

    Just wondering whether the RBA will allow inflation to run away above 2% – I guess they will.

    Does someone know whether the RBA directly supports the stock market with active positions at the moment? I find the ASX’s strength given AU’s dire economic outlook a bit suspicious.

    • What is our asset level that we have left to sell? If this keeps going the RE might be worth a lot!!! Selling assets is how we have survived for many decades. The world may want to come here even more than before.