The RBA’s recent foray into unconventional monetary policy has provided much-needed support to Australia’s ailing bond market.
The RBA reduced the cash rate to 0.25 per cent and launched a quantitative easing program late last week in an attempt to correct the course of markets in freefall after the coronavirus outbreak.
“After some of the worst liquidity that we have seen since the GFC, we believe these measures should help stabilise the bond market,” said Chris Rands, fixed income portfolio manager at Nikko Asset Management.
“While there is some uncertainty around just how much buying the RBA will be doing, the fact that they are pinning three-year bond yields to 0.25 per cent means that the economy can have some certainty around low and stable rates for the foreseeable future.”
The spread between longer dated bonds and cash has now started to rise to an above-average level, and the “backstop” of the RBA should help stabilise the long end of the curve, potentially taking some volatility out of the market.
Given that unemployment is expected to rise as the impacts of the coronavirus broaden, while commodity prices fall due to a price war between Saudi Arabia and Russia, we can also expect that interest rates will stay where they are for some time.
“We believe it is safe to assume that the RBA is some time away from achieving both sustainable 2 per cent to 3 per cent inflation and full employment,” Mr Rands said.
“This means we can now expect a 0.25 per cent cash rate for the foreseeable future and not expect the cash rate to rise anytime soon.”