Business

New pressure expected on government bonds

“Certainly, in the open air yesterday [the market] talked a lot about the aftermath social distancing rules announced by the [national cabinet] and what that means for auctions and open houses, “said Plank.

“States, obviously, to varying degrees, get a lot of revenue from stamp duty. So I think that decision made everyone think that in reality there was a lot of uncertainty around the revenue of State.”

The Reserve Bank has indicated “loud and clear” that it will intervene as necessary.

But while it is clear that the Reserve Bank will participate, there is no complete clarity as to when and how the central bank enters the semi-market.

“They have not told us the conditions under which they will buy semi-finished products or govies,” said Mr. Plank.

“All they told us was that they are targeting a three-year bond, and that they want to make sure that the yield curve is broadly consistent with that and that they will be active in the market to make sure there are no disturbances. “

Seconds only

Despite this, the RBA’s intention and action to date has given some confidence, said Garreth Innes of Aberdeen Standard Investments.

“At a high level, it helps to know that there is a buyer,” he said. “It’s not just the governments or the semi-finished, it’s the credit markets where we’ve been particularly stressed. And parts of those markets, there was no buyer there.”

The deterioration in the overall debt market follows increased uncertainty about the ability of businesses to repay their loans and meet their repayment obligations as refinancing options dry up.

This means that owners of semi-bonds are less likely to sell, says Innes, perpetuating the liquidity problem.

“The other thing is that you need willing sellers, right? You need people to want to be willing to give up on that stuff. And I guess until you see liquidity improving on the corporate bond market, there could be a reluctance to let go of these things when the [corporate debt repayment] side of things is not 100% clear, “he said.

“And as a manager, you have to keep somewhat liquid securities in there to meet your repayments as they happen. So I think it will take some time to see how it goes.”

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