Australian Tapering and Implications for Bonds
Tapering is the reduction in the rate at which the Reserve Bank of Australia (RBA) buys new assets. It’s commonly used to describe the reversal of quantitative easing (QE) and the initial winding down from a period of monetary easing policy. Tapering is not to be confused with a tightening RBA policy. When the RBA talks of tapering its QE program, it is reducing the value of assets that it’ buying each month. When the RBA tightens its QE program, it will no longer add any assets to its balance sheet, and will instead reduce the assets it holds by selling them.
Chart 1. Aussie Yields Tumble as Virus Resurgence Spurs Lockdowns
Source: Bloomberg
In the RBA’s instance, they are currently purchasing AUD5bn per month until September 2021, upon when, they are looking to then purchase bonds at AUD4bn per month until November 2021 or potentially longer.
The RBA has flexibility depending on the take-up of vaccination rates and length of lockdowns from COVID-19 to adjust the rate at which they buy new assets. If the RBA does fall short of their inflation and/or unemployment targets, then they’ll be quick to add to their asset purchasing program to provide liquidity to the market.
Chart 2. RBA Assets
Source: RBA
In our view, the RBA’s well publicised and laid out monetary policy plan, has reduced any chance of a ‘taper tantrum’ or significant fall in bond prices (rising yields) in financial markets. There has been a rigorous effort from central banks globally to provide stability and certainty to financial markets, especially during the COVID-19 period.
A larger event for bond prices (and yields) and financial markets will be when the RBA decides to tighten its QE program and start selling assets from their balance sheet. However, based on the recent RBA rhetoric from Governor Phillip Lowe, this is still a long way off: “The RBA’s conditions for rate hikes – sustainable inflation within the target band – are unlikely to be met until late 2024. We expect its QE program to be extended again in November, with a further reduction in the pace of purchases likely.”
From that perspective, Australia investment-grade credit still offers good value and should be relatively stable at least for the next 12-24 months.
Chart 3. Central Bank Total Assets (Per Cent of GDP)
Source: Central banks, RBA, Refinitiv
About Matthew Macreadie
Matthew’s current responsibilities include providing credit commentary/views on the bond market and specific issuers, with the aim of aiding investors to make better risk-return decisions.
Prior to joining Income Asset Management, Matthew spent eight years working as a Credit Portfolio Manager at Aberdeen Standard, where he was responsible for the credit portfolio construction and security selection across a wide range of financial and non-financial sectors.
Matthew began his career at KPMG working in Auditing and Assurance within the consumer and industrials group. Matthew holds a Masters of Applied Finance from Macquarie University and a Bachelor of Commerce from UNSW.
