Lighter debt gives the RBA more weapons

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With the decline in new bond issuance, the buying of RBA bonds – known as quantitative easing – becomes much more powerful.

Buying bonds increases the demand for bonds, which reduces the yield or borrowing costs of those bonds.

The RBA has blocked a $ 200 billion bond buying program. With fewer new bonds to buy, the theory is that the purchasing power of the RBA increases and the yield on bonds decreases.

RBA vice-governor Guy Debelle specifically referred to this more powerful purchasing power of the RBA.

“Over the past few months, the RBA has often bought bonds at a faster weekly rate than that issued by the Australian Office of Financial Management,” he said last week.

“This is not true in some other countries, especially the United States. As a result, the RBA’s share of the bond market is growing faster than in other economies. “

National Australia Bank economist Tapas Strickland said on Tuesday that a gross debt issuance of $ 160 billion next year would be enough for the RBA “likely to need to cut QE, which is rising. to $ 100 billion every six months ”.

With the debt issuance now even lower at $ 130 billion, Mr Tapas said, “This clearly adds to the argument that the RBA will decline.”

However, David Plank, head of economics at ANZ, takes a different point of view.

He said the government’s deficit positions had not improved as much as the market expected and that financial markets’ expectations of how much AOFM should increase were actually more, not less, than what was needed. expected.

“While we haven’t made a final call on whether the RBA will decrease, we believe the budget has reduced the need to reduce the RBA,” he said.

“This is because it reduces the risk that the purchase of the RBA will have an impact on the market.”

Commonwealth Bank quantitative strategist Philip Brown said the government’s decision not to stabilize debt numbers meant the AAA credit rating was likely to be lost in the medium term.

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