“There are alarming liquidity signals and it is very dark right now,” said a source in the bond market.
Yields on 10-year Australian government bonds climbed to 0.96% on Friday afternoon, up from 0.77% that morning and 0.66% on Wednesday.
Yields have increased due to panic from foreign investors such as hedge funds struggling to repatriate money to their home markets and in a context of concern, institutional investors may not be able to renew their own loans.
Local banks and investment banks, known as market makers, are mopping up federal government securities, increasing their demand for short-term liquidity from the RBA.
As the Morrison government prepares to run deeper budget deficits to fund its $ 17.6 billion coronavirus stimulus, its debt management agency, the Australian Office of Financial Management, will try to sell a $ 500 million bond maturing in 2032 to investors.
This will be a test for investor appetite for Australian government securities rated AAA, but will also provide an important opportunity for AOFM to establish a “price discovery” in the market and send a signal that the government can finance itself under tight market conditions.
The government is ahead of its funding schedule and could afford to sit on the debt market for several weeks, while commercial banks could do without the bond markets for several months.
As of Friday morning, the RBA injected $ 8.8 billion into the “pensions” market, up from $ 3.74 billion originally planned, effectively providing short-term liquidity to counterparties in commercial banks in exchange for collateral.
Buyback agreements allow commercial banks to temporarily exchange collateral such as bonds, commercial bank paper and mortgage-backed securities (RMBS) in exchange for RBA cash.
The central bank has also provided longer-term funding of up to three months, which it does only occasionally.
The three-month bank note exchange rate increased by 5 basis points to 0.62%.
“There is a strong sale of bank note futures, much like the GFC,” said a trader.
After allowing some of the RBA’s daily purchases to take off, the net injection was around $ 7 billion.
Commercial bank cash sources said liquidity had almost evaporated from the credit markets.
The RBA does not buy government bonds directly, or carry out so-called quantitative easing (QE), although there is speculation in commercial banks, this could happen soon.
QE would supply a new buyer of RBA bonds, creating new demand and helping to alleviate liquidity problems.
The largest repo tranche of the RBA was $ 5.625 billion in financing over 95 days at a weighted average of 0.66 percentage points.
The RBA also provided $ 610 million in 17-day repo funding at 0.80 percentage points, $ 2.6 billion in 27 days at 0.83 percentage points.
These rates imply that the borrowers are ready to pay a margin higher than the prevailing bank rate.
Market sources have said that the pension funds in the sector are facing a large influx of transactions as they manage an influx of rebalancing and investment transfers from their members.
The situation has changed dramatically since Wednesday, when the sub-government Guy Debelle said that there had been a substantial increase in corporate debt spreads in the global bond markets, but not a general disturbance.
“My general feeling, speaking to participants from around the world, is that there has been more of a story of repricing … rather than a story of major sales – not in all markets,” he said. Wednesday.
At this point, the RBA had only slightly increased short-term lending to banks as part of its normal daily operations.
Unusually, the US bond and stock markets both sold on Thursday evening. They usually move in opposite directions.