ABE Weekly 08/07/2020

Market Update  

The RBA left interest rates as expected unchanged at 0.25% with consumer and business confidence one of the major concerns. This uncertainty clearly means that interest rates will continue to stay low for a prolong time and Dr. Lowe further said that “The substantial, co-ordinated and unprecedented easing of fiscal and monetary policy in Australia is helping the economy through this difficult period and it is likely that fiscal and monetary support will be required for some time.”

Earlier in the week the Australian Office of Financial Management (AOFM) which manages the Australian Government debt announced its forecast bond issuance between now and the 6th October budget. The AOFM has indicated it plans to issue A$4-5b per week of nominals and A$2-4b in t-notes. This means the total funding requirement to the Oct Budget date could be anywhere between A$84b to A$126b. The AOFM outlined new Treasury bond lines maturing in 2025, 2026, 2031 and 2032 will be established in 2020-21. In addition, a new 30-year benchmark Treasury Bond line maturing in June 2051 will, subject to market conditions, be established before 30 September 2021.

On some corporate news the Virgin saga continues to be up in the air. Not sure why the press jumped all over the administrator’s decision to put forward the Bain proposal when there was no real alternative post Cyrus capital pulling out. We always knew that whatever the proposal the creditors – made up of bondholders and staff – had to vote in favour of whatever deal was put forward. The main bondholders, Broad Peak and Tor Investment Management, have lodged a case with the Australian Takeovers Panel to allow an additional proposal to be put forward. It’s only logical that the Panel considers the alternative. With the vote expected in August there is plenty of time to launch a counteroffer.

On some positive news out of the US, the recently published employment numbers for June stated the country had added more than 4.8 million jobs in the month. This was far greater than expectations of 2.9 million jobs and led to the unemployment rate falling from 13.3% in May to 11.1% – a significant move. At the same time however the Labour Department said initial jobless claims rose another 1.38 million. With COVID cases spiking to more than 50,000 a day, things are certainly far from under control and at last count there were 130,000 deaths in the US alone. What this means is that the US Fed will continue to be supportive at the expense of propelling even higher asset prices. Our view is that it’s only a matter of time before the cracks start to appear and we see another risk off scenario and fixed income is in favour again.

Earlier in the week the Federal Reserve policymakers discussed the need to bolster forward guidance in the coming months and suggested that the jury was still out on the use of yield curve control, according to the Fed’s June meeting minutes.

“Various participants noted that the economy is likely to need support from highly accommodative monetary policy for some time and that it will be important in coming months for the Committee to provide greater clarity regarding the likely path of the federal funds rate and asset purchases,” according to the minutes.

Furthermore, Fed members discussed two tools for conducting monetary policy when the federal funds rate is at its effective lower bound, including forward guidance and large-scale asset purchase programs in supporting employment and inflation and an approach that caps or targets interest rates along the yield curve — a measure allowing central banks to target specific government bond yields through the purchase and sale of bonds, to help keep lending rates near zero.