Playing the QE waiting game

Market participants expect government-sector borrowers to be the primary beneficiaries if the Reserve Bank of Australia (RBA) does enact any form of QE in 2020. Issuers are not counting on it but agree that it is on the minds of investors, especially from offshore.

ZAUNMAYR QE is on the cards in Australia despite the reserve bank maintaining that there is a high bar to clear before it happens. Most market commentators speculate that, if QE does emerge, it would focus on government and semi-government bonds. Can government issuers pre-position for what must be considered at least possible?

HOMBERGER There isn’t much we could do to pre-position for an event that may or may not happen, given our job is to fund our state government. As the government has a call on cash, we will continue our normal task of funding that requirement.

NICHOLL We won’t know what, if anything, the RBA will do until we are in that world. The RBA would presumably guard its specific intentions extremely closely to keep market participants from front-running in any way.

On a recent investor trip, we were asked how likely it is that the RBA will engage in an Australian version of QE. Our response was that it is not an issue for the Australian Office of Financial Management (AOFM) to predict and there is plenty of publicly available information so others can make their own assessments.

What can be said is that should the RBA make this decision, it will do so after careful consideration of all the possible downside impacts of such action. Such effects could include the impact of the RBA as a government-bond buyer on market liquidity.

The AOFM and the RBA have a history of understanding what the other organisation is seeking to achieve and the context. Formal agreements have never been required in Australia to avoid unnecessary distortion or disruption in financial markets from the intersection of RBA and AOFM operations.

One of the reasons we see so much noise in the market around issues like QE is unhelpful speculation and overthinking about what authorities may or may not do. We should wait until the response is revealed, if it is required, and then make our own adjustments to meet the new state of nature.

There are so many things we just can’t anticipate with any degree of accuracy and sometimes getting something a little bit wrong can almost have the same effect as getting it a lot wrong. It is best to wait and see.

KENNEDY It is not much different from when the HQLA [high-quality liquid assets] requirements changed. We were responsive to changes in the supply-demand dynamic at the time. I don’t think there is anything to gain by being pre-emptive.

ZAUNMAYR Do issuers think investors are or would be concerned about a potential liquidity squeeze that could result from QE?

KENNEDY Their investment mandates will adjust to the supply-demand and pricing dynamics.

NICHOLL There were a lot of questions about the effect on liquidity when we were in north Asia and Japan in November 2019. We won’t know until we see what the RBA does, if it does anything. But everyone should remember that both the RBA and the AOFM understand the importance of good liquidity.

ZAUNMAYR The reserve bank has been keen to keep downward pressure on the Australian dollar through monetary policy. How would a lower dollar influence offshore demand for government and semi-government bonds?

NICHOLL It is okay so long as investors don’t perceive a precipitous drop, in which case I would expect them to hold back. We often see central-bank investors topping up their allocations when the currency weakens, so investors’ reactions vary. It is more contingent on whether investors think the move is about to happen or has already happened.

TRIGONA Investors like currency stability. They are usually comfortable once they see a fall and subsequent stabilisation.