RBA injects $8.8 billion into credit markets

“There are alarming liquidity signals and it’s very dark out there at the moment,” a bond market source said.

The 10-year Australian government bond yield had spiked to 0.96 per cent on Friday afternoon, from 0.77 per cent that morning and 0.66 per cent on Wednesday.

The yields rose due to panic selling by offshore investors such as hedge funds which are scrambling to repatriate cash to their home markets and amid concerns the institutional investors may not be able to roll over their own borrowing.

Local banks and investment banks, known as market makers, are mopping up the federal government securities, increasing their demand for short term cash from the RBA.

As part of its daily market operations the RBA injected $8.8 billion into the “repo” market on Friday morning, compared to the $3.74 billion original intended volume, in effect providing short term cash to commercial bank counter parties.

Repurchase agreements are where commercial banks temporarily swap collateral such as bonds, commercial bank paper and residential mortgage backed securities (RMBS) in return for RBA cash.

The central bank also provided extra three month liquidity, which it only occasionally does.

A trader welcomed the increase in the RBA’s open market operations activity.

“I think that’s a positive step for the market that the RBA is supporting liquidity…pity no one is supporting credit markets as no balance sheets are buying.”

As the Morrison government prepares run deeper budget deficits to fund its $17.6 billion coronavirus stimulus, its debt management agency, the Australian Office of Financial Management will attempt to sell a $500 million bond expiring in 2032 to debt investors on Wednesday.

It will be a test for investor appetite for AAA-rated Australian government securities, but also provide an important opportunity for the AOFM to set “price discovery” in the market and send a signal that the government can fund itself in stressed market conditions.

The government is ahead of its funding schedule and could afford to sit on the debt market sidelines for several weeks, while commercial banks could go without tapping bond markets for several months.

The three month Bank Bill Swap Rate increased 5 basis points to 0.62 per cent.

“There’s heavy selling of bank bill futures, a bit like the GFC,” a trader said.

After allowing for some of the RBA daily purchases rolling off, its net liquidity injection was about $7 billion.

Commercial bank treasury sources said liquidity had almost evaporated from credit markets.

The RBA is not directly buying government bonds, nor is it conducting so-called quantitative easing (QE), though there is speculation inside commercial banks this could happen soon.

QE would provide a new RBA buyer of bonds, creating new demand and helping ease liquidity problems.

The RBA’s largest repo tranche was $5.625 billion of funding on 95 day term at a weighted average of 0.66 percentage points.

The RBA also provided $610 million of 17 day repo funding at 0.80 percentage points, $2.6 billion of 27 day funding at 0.83 percentage points.

Those rates imply borrowers are prepared to pay a margin above the prevailing bank rate.

Sources in the market said the industry superannuation fund cash desks were dealing with a large influx of transactions as they manage an influx of rebalancing and investment shifts from their members.

The situation has abruptly changed since Wednesday when deputy government Guy Debelle said there had been a material increase in corporate debt spreads in global bond markets but not widespread disruption.

“My general sense from talking to participants around the world is that there has been more of a repricing story… rather than than a large selling story – not in every market,” he said on Wednesday.

At that stage the RBA had only slightly increased short term lending to banks through its normal daily operations.

Unusually, US bond and equity markets both sold off on Thursday night. They typically move in opposite directions.