Infinite QE

The latest RBA bond purchase program aims to make credit accessible and inexpensive despite the threat of a recession against the economy due to the growing coronavirus crisis.

As part of the newly announced QE policy, the RBA bought government bonds worth AUD 4 billion in an effort to maintain short-term yields around its target of 0.25%. This is the second day of bond purchases launched last Friday, when the central bank bought local government bonds worth AUD 5 billion.

Australia is expected to enter lockdown isolation starting this week amid a sudden surge in the number of cases across the country. So far, more than 1,600 cases have been confirmed and the government has closed the borders to prevent the spread of infection throughout a wider area.

The Federal Reserve has just promised unlimited asset purchases to support the market, after announcing a number of new programs on Monday to help market function. Among these steps is an open commitment to keep buying assets under QE in the amount needed to support the smooth functioning of the market and the effective transmission of monetary policy to financial conditions and broader economy. There are several other programs, including Main Street business loans and others aimed at maintaining credit flow. The market reversed all losses overnight and showed a sharp positive opening.

The Fed will also move for the first time into corporate bonds, by buying securities on the secondary market and through exchange-traded funds in an effort to expedite space since the crisis turmoil is increasing and market liquidity is weakening. There will be steps to purchase securities supported by commercial mortgages as part of expanding asset purchases, known in the market as quantitative easing. This step is an expansion to the commercial real estate sector for central bank acquisitions.

The Fed said in a statement that amid the ongoing uncertainty the US economy will face severe disruption. Aggressive efforts must be made across the public and private sectors to limit losses on employment and income and to promote rapid recovery after the disruption subsides.

Monday's announcement was the most aggressive market intervention so far. The market reacted positively to the move, cutting all losses in the futures market that limited losses in overnight trading.