NEWNAHA I think this is a fair assessment, at least in the near term. I agree that it feels as if the news is going to get worse before it gets better. The risk is we are going to get a continued blowout in credit spreads, which would keep investors skittish.

If this is the case, it will obviously affect the amount of issuance we have coming into the market and the appetite to absorb that supply. At the moment, the focus is going to be on liquid, highly rated issues for the next couple of months.

Government bond issuance is going to ramp up significantly, but the RBA will also be buying a lot of bonds. The AOFM will be purchasing about A$15 billion of RMBS and ABS over the next couple of months. There is a contrast with 2008, in that the AOFM ended up purchasing A$15 billion back then but over four years. The risk is that the AOFM comes more aggressively this time to address funding issues.

Ong It is the right decision for the RBA and AOFM to step into markets like this, which are dislocated and where there is much uncertainty and illiquidity.
The RBA’s announcement on 19 March will deliver greater certainty going forward and should encourage the private sector to come in at some point, particularly when things start to settle down.

The RBA’s enhanced forward guidance, in effect anchoring the front end of the curve and providing certainty around where securities at that three-year point will trade. It also confirmed that it will be in the market across the curve in times of dislocation. These steps send the right signals to an uncertain market that is not prepared to participate now.

The measures will go a long way towards anchoring expectations around where yields will be over time. They will bring back private-sector participants. This is what you want to see with unconventional policy.

Evans What the RBA is doing is what a central bank should be doing. The most important aspect was to provide funding for the banks. The banks are the most important part of capital markets and the RBA support means they do not have to have to go to the markets for quite some time and will not be exposed to this blowout in spreads. The banks were already well positioned before the crisis, too.

I don’t think the supply story is particularly important. There will be a fair bit of disintermediation as whatever credit is being created goes back into the banking system. It is all about demand rather than the supply of credit in this environment.

We have the instant write-offs, for instance, but how much of this will corporates want to take advantage of considering uncertainty and low confidence?

From the economic perspective, it is the demand for credit rather than the supply that is critical at this point. The RBA can help on supply by flattening the curve and potentially bringing in credit spreads but demand is what is important for the economy.

Yetsenga I agree – demand is the main issue. All policy can do is try to minimise the fall in demand. It is inconceivable that the demand for credit in aggregate would be stronger in this period.

There are two other points to make. One of them is around Australia in particular. We know the offshore experience, specifically that zero rates, QE and a flat yield curve – which the RBA is targeting – cause damage to the financial system.

This is especially true for the parts of the financial system that we might call the shadow banking sector, but it even affects the parts that are primarily deposit funded. I think there will be some noticeable adjustments to the financial system in Australia as these conditions go on.

Somewhat related, two-thirds of US debt has been intermediated by the market not the banks. Australia has an advantage, to some extent – the big end of town can get in a room and talk about policy to deal with circumstances. You can’t encourage the bond market in the US to exercise forbearance around rolling over loans and evergreening some credits that may be having short-term repayment problems.

I think the US economy is a huge problem here.