Local corporate bonds have yet to make it on the Reserve Bank of NZ (RBNZ) balance sheet but the backstop facility has eased liquidity concerns in the market, deputy governor, Christian Hawkesby, told the emergency government committee last week.
Hawkesby told the Epidemic Response Committee (ERC) last Thursday that the RBNZ had not to date purchased any NZ “corporate paper” under its coronavirus liquidity-pumping mandate.
“But what we’re getting told is the fact we have the availability to hold corporate paper is providing banks the confidence to buy that corporate paper off their clients in the knowledge that they can always come back to us and receive funding for that,” he said. “We think it’s helpful on the margin.”
The NZ central bank has already given much relief to local fixed income managers after swallowing a $3 billion tranche of Local Government Funding Agency (LGFA) debt early in April.
An April 3 Monetary Policy Committee (MPC) note says while the RBNZ large-scale asset purchase program (LSAP) had successfully pushed down government bond yields “there were growing signs of a lack of liquidity in the broader corporate bond market”.
“The Bank had observed signs of increasing illiquidity and dislocation in the Local Government Funding Agency (LGFA) market in particular in recent weeks,” the MPC note says. “This could be largely attributed to a combination of the near-closure of global credit markets, domestic intermediaries reducing their participation due to recent volatility, and fund managers liquidating their holdings in order to meet redemptions.”
LGFA debt represents a key part of local fixed income portfolios with any market seizure likely to cause major problems for fund managers.
Under its LSAP, the RBNZ has so far purchased $33 billion of NZ government bonds (with more expected to come), squashing the yield curve to a flat-line stretching out 10 years, governor Adrian Orr told parliamentary committee last week.
The RBNZ quantitative easing (QE) measures were designed to “keep rates low along the curve”, Orr said.
“For example, the cost of 10-year bonds is now the same as the overnight rate,” he said.
According to Orr, the so-called ‘unconventional’ measures such as QE were now standard practice globally.
The RBNZ governor also confirmed that negative interest rates remained on the table as a monetary policy weapon. When unveiling its coronavirus monetary arsenal in March, the central bank said negative interest rates would not be considered for at least one year.
“We haven’t ruled [negative interest rates] out,” Orr said. “But we want to give QE time to work first.”
An earlier introduction of negative interest rates wasn’t possible, he said, as some bank systems could not yet cope with the concept.
“We think we can get the same effect with QE,” he said. Orr said the central bank QE program was “between a half and two-thirds” complete.
The first QE burst has seen the equivalent of about a 150 basis point cut in the official cash rate (OCR), Hawkesby said.
“That’s a ballpark figure based on international research – it will vary from country to country,” he said.
Hawkesby told the government committee that recent International Monetary Fund (IMF) projections for a 7 per cent fall in NZ GDP this year followed by a 6 per cent rise next year included “some rosy assumptions”.
Regardless, the data points “to a weak economy and a sharp rise in unemployment,” he said.
Estimated NZ unemployment figures ranged from 35 per cent at the current Alert Level 4 falling to 5 per cent when the country returns to Level 1, Hawkesby said.
Across industries, he said the data showed just 16 per cent of food and accommodation workers (the most-affected sector) remained in employment now compared to 80 per cent of government employees.