By David Lawson
The recent stall in Commonwealth Government Securities on issue will continue to put pressure on the Reserve Bank of Australia to reduce the cash rate. As noted by Glenn Stevens in this weeks Media Release on the June Monetary Policy Decision:
10-year bond yields averaged a decline of 3 basis points per trading day for the month of April. The spread on government bond yields and the Target rate continues to widen.
It is crystal clear that the force behind the demand from investors is the desire for a safe haven when risky assets are so downside volatile, but what about the CGSs supply side of the market? The CGSs market was increasing at an average rate of 3% per month since September 2008, but this growth engine has since stalled. In April Commonwealth Securities on issue declined by 4%, in a period of heightened uncertainty and volatility in the global financial markets. This could be seen as the result of a legislature-imposed supply constraint, given the Australian Federal government’s debt ceiling, as shown in Statement 7 of the 2012 budget:
At a 3% monthly growth rate, CGSs on issue would have surpassed the $250 billion ceiling last month.
With the Australian Federal Government approaching their credit limit, CGSs are inherently feeling the pressure of scarcity, driving up prices and pushing yields down. This is giving weight to somewhat subjective statements about further interest rate cuts this year in the press, whereby the RBA will need to continue cutting the cash rate to follow the trend of government bond yields.
This ceiling is encumbrance on foreign buyers on have brought up large amounts of the CGSs, adding to our official-net foreign debt levels.
Which has also played a primary role in overinflating of the Australian dollar.
Naturally, as interest rates fall following bond yields, the Australian dollar will come back to a more realistic valuation, and we will soon discover that Australia is in fact not different!