UBS: QE to crush Australian bond yields

See the latest Australian dollar analysis here:

Macro Afternoon

Via UBS:

AUD & NZD: Upside risks to front-end NZD rates; RBA QE + CLF = lower AU 10y

The RBNZ hasn’t been providing a forecast path for the OCR for the quarters after March-21; but we expect this to change at the 11 November MPS (see here for our preview). If the RBNZ refrains to provide a (lower) forecast path for the OCR post Q1- 21, we think that markets would interpret that as a signal that the FLP has reduced the urgency to cut rates. This could drive a material sell-off in front-end rates, given that markets have currently priced ~40bps of cuts by August-21. In such a scenario, the upside pressure on short-term rates is likely to be intensified by an increase in pay flows due to mortgage fixing. On the back of these risks, we close our Rec RBNZ Feb-21 meeting OIS with a small loss of -2bps. In Australia, the focus will remain on RBA QE, with the Bank set to buy $5bn/week of AGS in the <12yrs sector ($4bn of ACGBs and $1bn/week of semi-government bonds). We think that RBA buybacks will be skewed to the ~10yr point; and we expect the 3s10s curve to flatten towards 50bps from here. Demand for 10yr ACGBs will also be supported by the forthcoming changes to the RBA’s Committed Liquidity Facility (CLF). With these two drivers likely to drive strong demand, we recommend buying ACGB 10y bond yields. We like to express this trade against UST 10yr as a hedge for a steepening in global curves. In the semi space, next week we get the Budget updates for the Northern Territory, South Australia (both on 10 Nov) and Tasmania (12 Nov).

Following the release of the Commonwealth Budget, the AOFM confirmed that they will gross issue $240bn of nominal bonds in FY-21. So far in FY-21, the AOFM has issued~$135bn. This means the AOFM is ahead of its required task, so it can now slow its pace of issuance sharply, to ~$3.5bn/week from ~$8.1bn/week YTD.
• While supply slows, demand should remain bid. First, we continue to expect strong demand from ADIs on the back of the unwinding of the CLF. Importantly, at its meeting in November, the RBA committed to do proper QE: over the next ~6 months, the RBA is on track to buy $80bn of ACGBs in the 5-12yr sector. As free-float shrinks, we expect the whole ACGB curve to shift lower and bull-flatten.
• The move lower in AUD 4y2y IRS should be facilitated by the expansion in the RBA ES Balances, which should see front-end OIS trade towards 0bps (the current deposit rate) and the OIS fwd curve flatten out. BOB is also likely to remain very low at ~6bps

In the case of the US, the announcement of QE has often marked the bottom of yields as markets have discounted it already and then shifted to anticipating inflation. In Australia’s case, there are reasons to think that UBS is right:

  • Aussie long-end yields are still the highest in the developed world;
  • the growth and inflation outlook is poor despite the virus success owing to crashed immigration, the Depressionberg Unstimulus, peak household debt (notwithstanding mortgages) and China decoupling all meaning a structural adjustment will be required;
  • US and global yields will likely fall ahead as the Atlantic economies fall prey to the virus again and fiscal stimulus fails to keep pace triggering more monetary easing.
David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)


  1. I’m sure the RBA could crush yields if they were sufficiently motivated but the full effect of the monetary injections won’t be visible until 2021 — they’ll be hoping that inflation doesn’t rear its ugly head then.

    • – The RBA performing QE may aleviate the financial pain for the good (/bad ??) folks in Canberra for a (short) while. But it will only help to increase the Deflation / deflationary pressures in the (near ??) future.

    • RBA will start buying corporate bonds soon. What choice do they have? As economy fails to burp well paid jobs or any jobs at all banks will be in real trouble. Banks are saying they will not force anyone to sell their houses until Sep 2021 and I am sure banks count that our economy will recover reasonably well by then so not many people will be left that will have to sell.
      This will work fine as banks will not have to push too many to sell and put pressure on RE prices which will amplify banks loses.
      However, if our economy slows further and non-performing loans actually grow instead of shrink our banks will be in serious trouble and will struggle to raise capital OS or from domestic investors. Well, money will be offered but at much higher IRs. This is where RBA will be forced to intervene and start buying bank’s bonds. AUD will be crashing against gold in a big way but I am not sure it will be crashing against other currencies as rest of the world will be taking similar actions in order to prevent complete meltdowns so all currencies will be falling against gold.
      When RBA’s bailout does not work, banks will have to consider foreclosures, and some will act early. Banks issue bonds but keep adding bad loans will show that banks won’t be able to pay those bonds back on maturity date – RBA may forgive that debt.
      There will be a point where one bank will do what the Margin Call movie played, move early and fast while prices are artificially high. If that happens then rest will panic and move too and we’ll have the RE crash many of us have been waiting to see.
      All this is irrelevant if economy starts to recover and well-paid jobs appear from somewhere. So far, I am only aware that only money can be created out of thin air.
      2021 will be more fascinating to watch than 2020. Hope all of us make it so we can keep debating what happens next.

  2. – @ Houses and Holes:
    I am sorry but the notion that a central bank controls interest rates (by e.g. “printing money” & QE) is sheer nonsense. Just look at the FED. The FED kept expanding its Balance Sheet from the early 1960s onwards EVERY year untill Jerome Powell took over from Janet Yellen (2017 ? 2018 ?). In that timeframe (1960 -2017/2018) there was only one year when the FED’s balance sheet shrank. That was in the year 2000.
    – But in spite of all that QE in the 1960s and 1970s, US interest rates kept climbing in those 2 decades. What do you mean “Central banks (RBA, RBNZ, FED, ………… ) controlling interest rates” ?
    – Right now, I am actually of the opinion (yes, I change my opinion A LOT OF times) that we will see a FINAL (very sharp) spike lower in rates before the REAL Deflation starts (= rising interest rates).
    – There is another datapoint that disproves central banks (think: QE) are to blame for a credit bubble. Again look at the US. In mid 2008 the total amount of US debt stood at $ 56 to $ 57 trillion. But the balance sheet of the FED still was at a (“mere”) $ 880 billion at about the same time. For A LOT OF people $ 880 billion is A LOT OF money. But at the same time $ 880 billion is only less than 2% of all outstanding US debt ($ 56 trillion) in mid 2008. If you want to blame someone for the detrimental effects of “QE” then you should blame the commercial banks (Wells Fargo, Citibank, Goldman Sachs, ………… ) who created over 98% of money(/credit). I am sure a similar story can be told for the RBA (RBNZ), CBA, NAB, ANZ, Westpac, …………. etc.

  3. – “Straya” running a Trade Surplus is also a reason why interest rates could go lower than e.g. US rates and the AUD going higher.