Central banks battle to gain control of wild global markets

Bloomberg

Central banks in the Asia Pacific pledged to spend billions of dollars and implemented new policy steps to stem a bond market rout.
The Bank of Japan (BOJ) and Bank of Korea (BOK) offered to buy bonds worth a total of $13.1 billion, while Japan’s authority said it would supply another $36.7 billion of funds. Australia’s central bank (RBA), one of the last major holdouts against quantitative easing, said it would buy government debt across the curve, while targeting a yield of 0.25% for the three-year bond.
The measures came after Asian bonds joined the wild sell-off seen in European debt markets the previous day as funds liquidated assets to hoard the dollar in preparation for a prolonged coronavirus pandemic. They also followed the European Central Bank’s move to launch an extra 750 billion euros ($820 billion) emergency bond-buying program.
The Reserve Bank of Australia’s historic announcement caused nation’s curve to steepen, with the benchmark 10-year yield briefly surging by a record 128 basis points as the three-year bond slipped. Yields in New Zealand also jumped by more than 30 basis points after last week’s meltdown in European debt on concern that governments will have to raise borrowings to fund stimulus measures to combat virus fallout.
The Federal Reserve last week said it was launching a program to support money market mutual funds. It has already slashed rates twice and pledged to buy more bonds.
The RBA cut the cash rate and said it would announce its intentions for debt purchases at 11:15 am local time each day, and it would also buy semi-government debt to address market dislocations. It will also provide a term-funding facility of at least A$90 billion for banking system.
A global liquidity crunch made matters worse for investors and exacerbated market moves. Trading desks continue to speak of the mentality of “selling everything” except the US dollar, with huge liquidations and de-leveraging taking place everywhere. The RBA’s QE approach differs from the Fed and ECB, which pledged to buy a certain amount of government securities to keep yields down. By directly targeting the yield instead, RBA isn’t committed to any set amount of purchases — an approach adopted by the BOJ in 2016.
“Liquidity in government bonds in recent days has been dire,” said Stuart Dear, deputy head of fixed-income at Schroder Investment Management Australia Ltd. “What is less clear is how well these actions will
support good functioning of the domestic bond market.”

The BOJ’s announcements were staggered over the day. Other than buying bonds up to 25 years in maturities, Japan’s central bank also offered to supply funds as markets will be shut for a local holiday on Friday. The 10-year yield was up half-a-basis point for the day at 0.075% after slipping to 0.04% earlier in response to BOJ’s unscheduled operations.
“The BOJ is strengthening its stance to provide ample liquidity to markets,” said Mari Iwashita, chief market economist at Daiwa Securities Co. “Japanese markets are heading into a long weekend and the steps show the bank wants to ensure funds are available.”
Given the credit risks rising across the globe and uncertainty in markets, Shinichi Ichikawa, senior fellow at Pictet Asset Management, expects the BOJ to keep taking similar unscheduled operations of at least a similar magnitude.
“If they make it less than 1 trillion yen next time, that would trigger all kinds of speculation over why,” he said.