The move by the Reserve Bank of Australia to a policy of fiscal stimulus away from monetary policy could cause a supply/demand battle and increased volatility as the central bank battles to support the economy amid COVID-19, Ardea believes.
This is the first major move away from traditional monetary policy in years, especially as Australia managed to avoid the need for quantitative easing during the Global Financial Crisis.
In March, the RBA announced a stimulus package of cutting rates to 0.25% and purchasing Australian government bonds across the yield curve to help achieve a yield target on three-year Australian government bonds of 0.25%. This would then help lower funding costs across the economy.
Gopi Karunakaran, portfolio manager at Ardea, said: “For the past decade monetary policy has been the dominant policy of central banks and now there’s a big shift towards fiscal policy and all this needs to be funded by the governments issuing government bonds. But this is not a good combination if bond yields are at record lows and we will see a big demand/supply battle”.
He said it created a scenario where bond markets would be unable to absorb the vast amounts of incoming government bond supply and, simultaneously, there were fewer pension pools to absorb the bonds as retirees began drawing down their retirement savings.
“Do bond yields go up or prices go down as there is too much to absorb or will central banks be able...