Targeting risk-free assets − implications for investors

RBA Governor Lowe has detailed his preference for a possible RBA Quantitative Easing (QE) program after further possible RBA rates cuts. Lowe suggests ‘’if’’ the RBA was to undertake such a program of QE, it would target ‘’risk-free assets of Government Bonds by buying these securities in the secondary market’’, as such a program of lowering risk-free asset yields seeps into all parts of the economy.

Interest rates - the virus that affects all things

This is incredibly important to fundamentally understand. So many investors have been blind-sided by the move into interest rate markets in the last 18 months, but this next possible phase has plenty of historical comparisons to help understand the implications for not only fixed income markets, but the linkages to all asset performance thereafter. We encourage investors to learn more about these global QE programs, the mechanics of how they operate and the performance of assets classes thereafter. We have written consistently over the years about interest rates being the ‘’virus that affects all things’’, and the ‘’rubber band of interest rates’’ (that can only be pulled so hard until everything snaps) and QE can impact everything. We will write deeply on these topics to help flesh out some of these linkages. There isn’t a consistent playbook around QE but looking at other global QE programs does help suggest decent scenarios for Australia into 2020 and beyond.

Governor Lowe repeatedly suggested that further interest rate cuts and QE are not his base case and are a ‘’fair way off’’ which would be good news for Australia if the RBA had a strong vision here. Sadly, it was less than a year ago that the RBA messaging suggested the following; ‘’the stance of monetary policy (then current as at December 2018) would continue to support economic growth and allow for further gradual progress to be made in reducing the unemployment rate’’ and, this standout, ‘’the next move in the cash rate was more likely to be an increase than a decrease.’’ Ouch. Three rate cuts later, Martin Place is seeing the ball like David Warner in England.

These extraordinary policies may well be a ‘fair way off’, and Lowe is right to point out that Australia has lots of positives including positive growth, positive demographics, lower currency, fiscal firepower etc, but now that Lowe has given the Australian market its famous ’put’ moment, my goodness the voices will be screaming for more stimulus at the first bumps in the road.