Obviously, this result will have a vast impact on global growth and US Treasury yields.
Secondly, Treasury Secretary Mnuchin requested and received the unused portion of Treasury support in various Federal Reserve programs. Many programs are set to end by December 31 this year. To be fair, Mnuchin intends to spend the unused money directly and the Federal Reserve’s programs are only minorly utilised.
However, the way financial markets work is based on confidence. With confidence of the Federal Reserve’s backstop, investors have been supporting credit markets, allowing zombie companies, who do not earn enough to cover interest costs, to add $US1 trillion in debt since the pandemic, according to Bloomberg.
One might argue that Biden’s new Treasury Secretary might have a new interpretation of the law and re-instate the support in January. One can also argue that market participants who depend on profit and loss have a knack for trimming positions into year end, conserving profits and bonuses, thus creating turbulence in credit markets, prompting markets to expect the Federal Reserve to do a QE twist in December.
“On the cusp of hope of recovery, it is time for the RBA to bring clarity to their own conviction and to stand by it.”
So, with a wide range of possibilities for US Treasury yields over the next six months, the implication is that the RBA is not in control of where absolute yields of Australian government bonds can trade. Note that less than a month before the RBA announced $100 billion more QE to the 10-year yield, Governor Lowe gave a speech that drew the focus to relative yields to US Treasury, similar to Canadian or New Zealand government bonds.
The thing is this. The RBNZ achieved negative relative yields to US Treasury by announcing a willingness to deploy negative policy rates since the pandemic. When the RBNZ sounded non-committal this month after good vaccine news, relative yields went from negative to zero.
Similarly, there is also a pretty strong relationship between where 10-year US Treasury trades relative to the Australian Government Commonwealth Bonds (ACGB) versus policy rate expectation.
In 2019, the ACGB 10-year yield traded 80 basis points under US Treasury, just because the Federal Reserve was hiking versus the RBA staying on hold or cutting rates.
QE for QE’s sake
Is there a point to the RBA doing more QE for the sake of it? Since April this year, ACGB 10-year yield has been trading 85 basis point on average, which is much lower than last year already.
Is the RBA trying to signal its willingness to be as dovish as other central banks? Is the RBA trying to influence the Australian dollar? Then, what is their tactical strategy for announcing more QE one day prior to the US election date, when the election result would overshadow, and now the Australian dollar is trading stronger since this QE announcement.
What the RBA is underutilising is the power of forward expectation. During her tenure, Yellen did not change policy for one and a half years, sticking by the power of time to heal the economy and her conviction of zero bound policy rates. Draghi turned around the European sovereign crisis with one “whatever-it-takes” moment.
On the cusp of hope of recovery, it is time for the RBA to bring clarity to their own conviction and to stand by it.