AUD Swaps: RBA Bond Purchase Program Review published

RBA Building
The AUD rates curve is bear steepening. The RBA considered a 25bp hike this month and published its Bond Purchase Program Review findings today.

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  • Curve bear steepens; Long flow

  • RBA considered 25bp hike

  • Bond Purchase Program review findings

  • 10y ACGB tender result

  • New issues


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Curve bear steepens; Long flow

The AUD rates market is selling off after US Treasury yields rose overnight on the back of stronger than expected housing market data. In late morning Sydney trading futures implied yields are 6-8bps higher and the 3s/10s futures curve is 2bps steeper at 23.5bps.


Swap rates have pushed higher and the curve is bear steepening on the back of the underlying sell off. In the shorter tenors there has been trade in 1- and 3-year swaps at levels around 3.6375-3.645% and 3.7775%. In the belly of the curve there have been deals in 5s around 3.96-3.965%.


Further out the maturity spectrum 7- and 10-year deals have been done at levels around 4.07% and 4.155-4.16%. 10s have also traded on a curve spread basis, with deals done in the 3s/10s and 5s/10s spreads around 38.75-39bps and 19.5-19.75bps respectively.


In forward space there has been small sized trade in 3m30y and deals have been done in 6m5y and 6m10y at levels around 4.06% and 4.22%.


Swap spreads have eased a little on the futures led sell off today. The 3- and 10-year EFPs are now marked around 27bps and 41.625bps and the 3s/10s box spread is steady at 14.625bps.



RBA considered 25bp hike

Minutes taken at the September RBA meeting were published Tuesday. The document showed that the Bank’s decision, to hike the cash rate target by another 50bps to 2.35%, was backed by the view that, “Inflation in Australia was at its highest level in several decades and was expected to increase further over the months ahead.” Key sources of uncertainty were noted as household spending and global economic growth.


Although the Bank delivered a fourth consecutive 50bp move a smaller increment was discussed. The minutes that board members had “discussed the arguments around raising interest rates by either 25 basis points or 50 basis points.”


It was noted that, “Monetary policy operates with a lag and that interest rates had been increased quite quickly and were getting closer to normal settings … The Board expects to increase interest rates further over the months ahead, but it is not on a pre-set path given the uncertainties surrounding the outlook for inflation and growth … The Board is seeking to return inflation to target while keeping the economy on an even keel. The path to achieving this balance remains a narrow one and clouded in uncertainty.”


In the concluding paragraph the RBA explained, “The size and timing of future interest rate increases will continue to be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labour market, including the risks to the outlook. All else equal, members saw the case for a slower pace of increase in interest rates as becoming stronger as the level of the cash rate rises. The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”



Bond Purchase Program review findings

This morning the RBA published detailed findings from a review of the Bond Purchase Program (BPP). The BPP was introduced in November 2020 to help counter the negative economic effects of the global COVID pandemic.


Key findings from the review were:


  • “The BPP, together with the other monetary policy measures put in place during the COVID-19 pandemic, contributed to the strong recovery of the Australian economy from the pandemic … These measures further lowered the whole structure of interest rates in Australia, and supported confidence in the economy in the face of serious downside risks … It is difficult to isolate the specific effect of the BPP on the economy. A key benefit of the package of policy measures was to provide insurance against the serious downside risks the economy was facing during the pandemic.”


  • “The BPP is estimated to have lowered government bond yields, but by somewhat less than generally suggested by international studies for a program of this size. This reflects the fact that the BPP was introduced at a time when other policy measures were already providing strong signals about future policy and bond market conditions were no longer strained so liquidity premia were low.”


  • “The effect of the BPP on government bond yields occurred around the time of the initial announcement of the BPP … The reduction in government bond yields contributed to lower borrowing costs across the economy and a lower exchange rate than otherwise.”


  • “For the RBA, the purchased bonds pay a fixed return, while the interest paid on the Exchange Settlement (ES) balances created to pay for the bonds varies with monetary policy settings. As interest rates increase there is a financial cost to the RBA from this. The ultimate cost will be known only once the last of the purchased bonds matures in 2033 … Under most scenarios, the Bank will not be in a position to pay dividends to the government for a number of years.”


  • “For the broader public sector balance sheet there are offsetting financial benefits … These benefits to government finances are material, although they are difficult to quantify.”


  • “BPP worked broadly as intended, without materially affecting market functioning.”


  • “The Board's communication of the considerations around adjustments to the BPP prior to the decision points … helped to avoid an unhelpful, disruptive adjustment as bond purchases were wound down.”


  • “As noted in the Review of the Yield Target (RBA 2022) … the Board has agreed to strengthen the way it considers a wide range of scenarios when making monetary policy decisions in future, especially where they involve unconventional policy measures.”


  • “The Board remains of the view that it is appropriate to consider use of unconventional monetary policy tools only in extreme circumstances, when the usual monetary policy tool – the cash rate target – has been employed to the full extent possible … if the use of unconventional monetary policies was being considered in future, the Board has not ruled out the use of either a BPP or a yield target. Compared with a yield target, a BPP would provide more flexibility to respond to evolving economic circumstances. However, a BPP could entail larger financial costs than a yield target, which would need to be carefully considered in the circumstances.”


The BPP ran from November 2020 to February 2022 and over that period the RBA purchased AUD281bn worth of government, state and territory bonds.



10y ACGB tender result

Earlier in the session the AOFM sold AUD800m in the ACGB 4.50% Apr 21, 2033 at a weighted average yield of 3.727%. The tail was 0.003% and the bid-to-cover ratio was 2.46.



New issues

  • HSBC Bank PLC issued a self led 18-month step up coupon bond. It pays a semi annual 3.20% coupon that steps up by 20bps every 6 months. Final maturity is Apr 4, 2024.


  • Zurich Finance Ltd sold a AUD200m 7-year EMTN in a deal led by Mizuho. It pays a semi annual 5.324% coupon and matures Sep 28, 2029.


  • NBN Co Ltd sold a AUD300m 4-year MTN in a deal jointly led by ANZ, CBA, NAB and Westpac. The deal was issued at a price of 99.827. It pays a semi annual 4.75% coupon and matures Sep 28, 2026.


  • Treasury Corporation of Victoria increased the size of its 2.25% Nov 20, 2034 bond by AUD100m, taking outstanding issuance to AUD5.458bn.


  • New South Wales Treasury Corporation added AUD200m to its 1.50% Feb 20, 2032 bond. The tap took the issue size to AUD9.086bn.