Investors lapped up Australia's latest long-term bond sale on Wednesday, even though its record-low coupon of 1.5% offered no more than the overnight cash rate, a sign some are wagering on drastic policy stimulus including maybe quantitative easing. The sale of A$3 billion ($2.1 billion) in a new 2031 line drew a hefty A$10.7 billion in bids to yield 1.6%, according to the Australian Office of Financial Management (AOFM), which manages the government's net debt portfolio.
Several investors told Reuters the lowly 1.5% offering still looked attractive as the futures market was now predicting the Reserve Bank of Australia (RBA) would cut its cash rate to 1.00%, or lower, in coming months. Economists widely expect the first move to 1.25% as soon as next week with Australia's economic growth sputtering, unemployment ticking higher and inflation staying lukewarm.
The RBA was one of the few major central banks in the world which did not adopt zero or negative interest rates after the 2008 global financial crisis. Neither did it resort to massive bond buying or balance sheet expansion such as carried out by the US Federal Reserve or the European Central Bank. But the situation is taking a turn now, perhaps for the worse.
"There is a fringe discussion at the moment that at some point if rates potentially get closer to 0.5%, then the prospect of QE comes up on the table," said Prashant Newnaha, Singapore-based senior rates strategist at TD Securities. "If QE gets seriously discussed then it will provide an ongoing bid at the long end of the (yield) curve."
Yields on Australia's 10-year debt hit a historic low of 1.493% on Wednesday, a world away from the 2.7% it offered at this time last year. Souring risk appetite amid a bitter US-China trade war has driven extra money into bonds with investors betting the Federal Reserve would be forced to ease monetary policy later this year. In such a scenario, the RBA is seen likely to be even more aggressive in its approach, keeping long-dated bonds in vogue.
Comments
Comments are closed.