New Zealand’s central bank needs to step up the scale and pace of its quantitative easing (QE) to achieve a meaningful fall in interest rates, market participants say.
Since beginning purchases last week, the Reserve Bank has bought NZ$1.4 billion of government bonds at four auctions. While yields have moved lower, the market is wary that an expected NZ$17 billion ($10 billion) of new supply in the next three months could force them back up again.
“I don’t think they should be afraid to come out all guns blazing to demonstrate to the market how serious they are,” said David Croy, interest rate strategist at ANZ Bank New Zealand in Wellington. “’They have got massive fire power and they should be prepared to use it, and use it early.”
When the RBNZ announced its NZ$30 billion QE program on March 23, it was much larger than expected, amounting to more than 40% of the bond market at the time. Since then, the government has stepped up its economic response to the coronavirus pandemic, prompting the Treasury to indicate a massive increase in bond issuance.
The RBNZ is seeking to buy NZ$1.35 billion of bonds, almost double the NZ$750 million weekly amount it initially said it would buy. That’s still much less than its Australian counterpart is purchasing.
In the first six days of its QE program, the Reserve Bank of Australia bought A$24 billion, or 2.5% of the bond market. The US Federal Reserve also hit the Treasuries market aggressively in its latest round of QE and signaled the size of the program is unlimited.
Croy said offers received by the RBNZ at this week’s QE auctions have been two to three times the amount of bonds sought, which suggests there are still willing sellers in the market, and they have to be soaked up in order to push yields lower.
New Zealand Debt Management yesterday said it will offer NZ$17 billion of bonds in the three months through June 30 from a combination of large weekly auctions and syndications. It sold NZ$800 million in a tender today. The flood of supply would struggle to find a home unless the RBNZ buys significant volumes.
The yield on the government bond expiring April 2029 rose yesterday before falling back to 1.1% today.
By comparison, Australia’s 10-year yield is at 0.7%.
Smyth said the RBNZ won’t want to react to daily market movements or make significant changes to its QE program so soon after it was announced.
However, the size of the program was based on where the RBNZ thought the bond market would be in 12 months’ time, “and that assumption has been shown to be too low,” he said. “The question is just when that gets formalised.”