(Bloomberg) -- A coronavirus-driven Australian slowdown may trigger unconventional monetary policy as soon as the middle of the year, according to market participants readying for QE.
The Reserve Bank of Australia may kick-start a bond buying program in a few months to buoy a battered economy, said AMP Capital Investors Ltd. Meanwhile, Kapstream Capital, BlackRock Inc. and Nikko Asset Management Ltd. are among funds that have been purchasing bonds in anticipation of further interest-rate cuts and the arrival of quantitative easing.
“The more worried the market becomes about the virus, the closer and closer you have to pull quantitative easing forward,” said Chris Rands, portfolio manager at Nikko, which has been buying Australian semi-government debt. “QE is coming, it’s a matter of when.”
The RBA slashed interest-rates to a record low 0.50% on Tuesday, leaving a mere quarter of a percentage point buffer before it reaches its lower bound for rates. While Governor Philip Lowe had only said in November that the hurdle to QE is high, the rapid deterioration in the global economy as the virus spreads has drastically changed the dynamics of the debate.
Read More: BlackRock Says Virus Panic Can Turn Aussie Yields Negative
Yields on three-year Aussie government debt tumbled to a record low 0.33% last week in anticipation of more rate cuts, with money markets expecting the RBA to ease again in April.
After that, quantitative easing is likely to arrive, said AMP Capital Investors Ltd. portfolio manager Dermot Ryan.
“It’s a second half story if it comes,” said Sydney-based Ryan. “Central banks are like generals fighting the last war” with conventional monetary policy now.
BlackRock Inc., the world’s biggest money manager, said QE may be implemented in the fourth quarter, according to Craig Vardy, head of fixed income for Australia.
As part of a QE package, the RBA may purchase sovereign and quasi-government debt across the yield curve, said Andrew Ticehurst, a rate strategist at Nomura. That could drive 10-year yields to as low as 0.50%, in line with the current cash rate. The benchmark yield was 0.69% Friday.
While market participants agree that QE is coming, opinion differs as to whether it will be effective or not.
Kapstream Capital, a unit of Janus Henderson Investors, has bought three to five year Australian government bonds in anticipation of lower rates and the potential for unconventional policy. However, it abstained from piling into 10-year debt on the view that RBA bond buying won’t be enough to lift consumer or business borrowings.
“We have duration as a hedge and short-end rates will likely also rally in QE, but on the whole I don’t think it will have a broader impact on the economy,” said portfolio manager Raymond Lee.
For AMP’s Ryan, fiscal policies or even cash payments to consumers -- such as Hong Kong’s recent handout -- may work better at kick-starting growth and spending.
“If we look at areas that have the most potential downside in Asia like Hong Kong, we know that they had strong stimulus,” Ryan said. “We think those types of stimulus reactions are going to be a lot more effective.”
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