International Financing Review March 21 2020 19People
&Markets
Australia eases banking fears
Australia took extraordinary steps last week
to support its banking system and the
economy in the face of the coronavirus
pandemic, rolling out quantitative easing
and lowering capital requirements in a bid to
inject liquidity.
The RESERVE BANK OF AUSTRALIA has
introduced QE into the local monetary policy
MIXûFORûTHEûlRSTûTIME ûDRIVINGûDOWNûDOMESTICû
yields at the short end of the curve.
The RBA set a yield target for three-year
Australian Commonwealth government
bonds of 0.25% last Thursday – in line with
the new, record-low cash rate – to be met
through open-ended secondary market
purchases beginning the following day.
Yields on the 5.5% April 2023 ACGB
tumbled from 0.62% to 0.34% on Thursday
and to 0.31% after Friday’s initial A$5bn
(US$2.9bn) purchases of maturities between
two and eight years.
The sovereign curve remained stubbornly
steep, however, with 10-year ACGB yields, a
more recognised market benchmark, quoted
at 1.26% on Friday.
This is well below Thursday’s brief 1.65%
intraday spike, but a long way from the sub
0.60% lows seen on March 9, before investors
took fright at the scale of Australian and
GLOBALûlSCALûSPENDINGûPLANSûANDûRESULTANTû
government bond supply.
In addition to buying government bonds,
the RBA rebooted a securitisation purchasing
programme employed during the global
lNANCIALûCRISISûTOûHELPûNON
MAJORûBANKû
lenders raise funds in the wholesale market.
Under the revived scheme the AUSTRALIAN
OFFICE OF FINANCIAL MANAGEMENT will run aA$15bn direct investment programme in
residential mortgage-backed securities and
asset-backed securities.
The ABS component makes the new
programme broader than the 2008 model,
when the AOFM allocated A$20bn
exclusively for RMBS purchases, eventually
buying A$15.5bn between 2008 and 2013.
Last week’s historic moves, including
huge money market liquidity injections, are
part of the RBA’s determined efforts to
STABILISEûTHEûlNANCIALûSECTOR ûPOTENTIALLYû
laying the groundwork for a reopening of
the shuttered local bond market.
Whenever that does happen, high-quality
ASSETSûWILLûNOûDOUBTûBEûlRSTûOUTûOFûTHEûBLOCK û
and the list would naturally include
Commonwealth and state government
bonds and bank covered bonds.
Covered bond programmes were
adopted by Australia’s four major banks –
ANZ, Commonwealth Bank of Australia,
National Australia Bank and Westpac – for
just such rainy days, immediately after
local legislation was approved in late 2011.
Suncorp, Macquarie and Bank of
Queensland have their own programmes
up and running.
Such bonds are typically Triple A rated
and are priced at around 70% of the spread
on senior notes – an enticing carrot to
issuers during periods of elevated credit
spreads.
This is certainly one such period, with
NEWûMAJORûBANKûlVE
YEARûSENIORû-4.SûNOWû
likely to be priced in the mid-to-high 100s,
according to syndication desks.
John WeaversBoJ easing fails to lift corporate bonds
Japanese corporate bonds remained under
pressure last week despite the Bank of
Japan’s easing measures, as extreme
volatility forced investors to liquidate
positions to cushion against heavy losses
from the stock market meltdown.
At an emergency policy meeting last
Monday, which was moved forward from the
originally scheduled March 18–19, the
central bank said it would buy an additional
¥1trn (US$9.16bn) of corporate bonds as part
of its monetary easing programme.
But the selling continued and was seen even
in credits with relatively high ratings, such as
Tepco Power Grid (BBB+/A by R&I/JCR), Hitachi
(A3/A/AA– by Moody’s/S&P/R&I) and Panasonic
(Baa1/A–/A by Moody’s/S&P/R&I).“Investors are selling those credits with
good ratings, as volatility has heightened
globally and as these credits are relatively
liquid – so it is easier to sell and to offset the
losses in stocks,” said a banker at a foreign
house in Tokyo.
Another banker agreed. “Globally,
investors want to have cash on hand now
because nobody knows when the spread of
the coronavirus will come to an end,” he
said. “Some are simply unwinding their
POSITIONSûBEFOREûTHEûlSCALûYEAR
ENDû;ONû
March 31].”
The BoJ also pumped US dollars into the
system last week to ease a funding shortage
amid a global dash for cash.
Takahiro OkamotoAûMASSIVEûlSCALûRESPONSEûAREûMOREûCRITICALû
than monetary measures to stop the market
bloodbath that has seen trillions in wealth
evaporated in a matter of weeks.
Former Fed chiefs Ben Bernanke and Janet
Yellen in an opinion piece in the Financial
Times suggested the central bank may
consider buying corporate bonds, which
THEYûWROTEûhISûUNDERûSIGNIlCANTûSTRESSvûAMIDû
worries about rising defaults especially
among energy companies whose stocks have
tanked due to plummeting oil prices.
TD Securities analysts said the Fed might
have to do more, such as loosening capital
constraints on banks, as Washington was
near a deal on a US$1trn stimulus package
to help consumers and businesses.
“The Fed has taken a number of key steps
to ease funding and liquidity conditions, but
some of these actions (such as Fed purchases)
need time to work through the system,” the
analysts wrote in a research note.
Some analysts expect the Fed to roll out
more old alphabet soup lending programmes
that were established to combat the global
credit crunch nearly a dozen years ago.
“We see three other crisis-era facilities
that the Fed could bring back if necessary,”
Goldman Sachs analysts said.
They said the Fed could tap the Term
Auction Facility, which is an alternative to
the Fed’s discount window for banks to
obtain term loans.
Furthermore, the Fed could revive the
Term Asset Lending Facility to buy longer-
dated credit if disruptions in credit markets
become widespread, they said.
Richard LeongSeveral corporate syndicate bankers said
that while central bank action was
welcomed, it was doing little to calm
markets. The primary bond market for most
issuers remains shut.
“The primary market is closed now and I
feel we’ll need some real stability this time
around to get investors interested in new
deals and it won’t come cheap for issuers,”
said the banker. “Central bank action is
helpful, but has no impact currently.”
In another step on Friday, the BoE
cancelled this year’s stress test of major
banks, following a decision by the European
Union last week to cancel its planned health
check of leading lenders.
The BoE also said new capital rules from the
global Basel Committee due to be phased in over
the coming years may also have to be pushed
back. It also said it was considering the impact of
new IFRS 9 accounting rules on banks.
Ed Clark
Additional reporting by Reuters5 IFR PM 2325 p 13 - 22 .indd 19 20 / 03 / 2020 20 : 28 : 46