Zero CLF a boon but not a game-changer for Australian issuers

A major market announcement in 2021 was the Australian Prudential Regulation Authority’s plan to wind down the committed liquidity facility (CLF) local banks have been able to use to top up their high-quality liquid asset holdings. This is likely to mean a larger bank bid for sovereign and semi-government bonds, though issuers say it will not completely reshape the market.

DAVISON The end of the CLF in all likelihood did not come as a big surprise to many but it has obviously had an impact on market dynamics. What have issuers seen so far, if anything, and what do they expect to see in the future?

NICHOLL We all reasonably expect the result will be a bit of a tailwind in the sense of bank balance sheets buying our bonds. But the change will be gradual.

As to whether there will be a shift in the mix of semi-government versus ACGB [Australian Commonwealth government bond] holdings as this unfolds, it is hard to predict. I cannot point to anything at present that I think reflects the outlook for a structural change in the appetite from the bank balance sheets once this process has finished, but it is hard to know what might happen during it.

KELLY I agree. Banks are keeping their plans fairly close to their chest, as we would expect. We know the asset swap level is the trigger to banks adding to their semi-government positions or lengthening existing positions, but it is still unclear how much they will need to add and over what timeframe.

KENNA ADIs [authorised deposit-taking institutions] are well-managed and they are not going to be in the position where they have to accumulate liquids at times that do not work for them. At the times when it does work, however, I think we will see them become a lot more meaningful investors than they have been in the past.

CINQUINA We have the same view. It is going to play out over an extended timeframe but clearly the bank regulatory bid will continue to provide an underlying level of support to semi-government debt issuance.

DAVISON Traditionally, banks have the bulk of their appetite at the short-to-mid end. If the banks become a bigger component in the market might it have an impact on the shape of the curve?

KELLY I think you have a point there – though we have seen a move further along the curve from the regional and major bank balance sheets that I think reflects a mix of where semi-government supply is coming and where the balance sheets can achieve their asset swap targets.

ADIs are well-managed and they are not going to be in the position where they have to accumulate liquids at times that do not work for them. At the times when it does work, however, I think we will see them become a lot more meaningful investors than they have been in the past.

ROB KENNA NEW SOUTH WALES TREASURY CORPORATION

DAVISON What role has domestic real money been playing as an investor in semi-government securities in recent months? How confident are issuers that this demand sector will remain significant even if there is a structurally bigger bid from bank liquidity books that drives in relative or outright yield?

KENNEDY I think there is also a third stream to this. As we have already alluded to, the February 2022 RBA [Reserve Bank of Australia] meeting will be very important specifically in the context of discussions about full or partial removal of QE. The RBA programme has had a significant impact across the market including the semi-government sector.

Looking at the various pieces, we can say with some confidence that the bank balance sheets will be ongoing buyers. But will this squeeze out domestic real-money investors? Probably not, I think.

The focus is probably more on the impact on the 5-8 year part of the curve the RBA has had via QE, and whether the removal of QE entails a more even approach to investing by the balance sheets. This could support expectations of a steeper curve, which would help investors that have a longer duration requirement achieve yields they have not been able to get in recent times.

Domestic investors will remain a very important sector for taking down supply across all the states, though. What we need to understand is what the supply and demand dynamic looks like, especially in a rising rate environment. There are a lot of moving parts here. Ultimately, the market always finds equilibrium, whether or not everyone is happy with where that point lies.