Monetary policy impotent on both sides of the Tasman

It seems that the Reserve Bank of Australia had already come to this conclusion, in relation to the Australian banks, and this may have influenced its decision not to lower the official cash rate the week before last. In fact, it indicated that the cash rate is likely to remain at 3.0 per cent for some time now, even though the bank will maintain an easing bias.

However, this means that the RBA is also in the difficult position of practically having exhausted all it can do with monetary policy. In the meantime though, attention is going to turn to term interest rates and these are expected to come under increasing upward pressure.

Following the announcement of the federal budget (both Moody's and S&P said the budget would have no impact on Australia's triple A ratings), AOFM advised that it will continue to sell CGS in amounts of up to $800 million twice a week, through to June 24. Next financial year it expects to continue this pattern of bond sales and issue a further $60 billion of CGS, of which only $6 billion will be to refinance maturing bonds.

Over the same period the US government is expected to sell US$2.0 trillion of bonds, and the UK government, £220 billion of bonds, though some estimates of the bond financing requirements of governments worldwide are significantly more than official forecasts.

Australia won't be selling its own debt in isolation. Also generating liabilities for the Australian government will be the government's infrastructure bonds and government-guaranteed bonds issued by the banks (hopefully diminishing), the states Commonwealth-guaranteed debt issuance, ABIP (the commercial property funding entity, if it gets past the Greens), OzCar (to secure car dealer financing) and perhaps more mortgage-backed securities investments.
 
The one advantage that Australia may have, is that its Australian dollar denominated bonds may be relatively more appealing to the Chinese and Japanese, than those of the US and UK.

(We note that the Bank of England is worried that the UK banking system may be about to be hit by a third wave of the current crisis and the IMF has called for the 'stress testing' of European banks.)

A sluggish economic recovery could keep the pressure off term interest rates as investors eagerly seek government bonds rather than riskier investments. Otherwise, could quantitative easing be considered?

In the meantime, AOFM sold $700 million of April 2012 Commonwealth bonds at an average yield of 3.86 per cent on Wednesday. The offer was 4.4 times oversubscribed. On Friday, $700 million of February 2017 CGS were sold at an average yield of 4.76 per cent and were 2.6 times oversubscribed.