The Reserve Bank of Australia offered to buy as much as A$5 billion ($2.9 billion) of government bonds on Friday, purchasing debt to lower yields now that its exhausted conventional policy ammunition.
Australian bonds held gains after the announcement, with three-year yields down 5 basis points to 0.3% as of 11:25 a.m. in Sydney, while 10-year yields were down 20 basis points at 1.29%. The Aussie dollar rose as much as 1.1% to 58.04 U.S. cents. The central bank said it will purchase securities maturing in July 2022, April 2023, November 2027 and May 2028.
RBA Governor Philip Lowe on Thursday reduced the benchmark interest rate to 0.25%, long flagged as the effective lower bound, following an emergency meeting in Sydney. He also introduced a target for the three-year government bond yield to be around 0.25%.
Federal and state government notes of varying maturities will be purchased to achieve this target, which will hold down borrowing costs in the economy.
Australia’s policy makers are joining peers in the U.S. Europe, U.K. and elsewhere in dropping interest rates back toward their limit and pursuing quantitative easing to counter the economic impact of the novel coronavirus outbreak.
The epidemic has sent Australia’s economy spiraling toward its first recession since 1991 and its credit markets have been under stress from investors worldwide trying to head for the exits.
The RBA injected A$4.25 billion into the system in Friday’s daily market operations, the smallest amount since March 12, and a massive reduction from Thursday’s record A$12.7 billion. Three-month bank bill rates tumbled 13 basis points to 0.52%, indicating some of the credit stresses may start to ease. The bank-bill rate spread to the similar tenor overnight indexed swap -- a key indicator of funding strains -- shrank to 31 basis points, also the lowest level since March 12.
Source : Bloomberg