Huge moves in New Zealand government bonds and fixed income markets have heightened risk that the Reserve Bank will have to move on quantitative easing (QE), BNZ interest rate strategist Nick Smyth says.
"The credit market, even for high-grade bonds, is extremely strained," he said.
"There is growing risk that the RBNZ announces a QE programme imminently, to restore market function and the transmission of monetary policy."
The NZ fixed interest market has experienced extreme volatility over recent weeks as financial fall-out from the coronavirus panic has spread.
"This is becoming a matter of urgency, with markets now very stressed," ANZ strategist David Croy said.
"Yields on NZ Government Bonds have risen significantly, and the curve has steepened sharply...Large-scale asset purchases will also be required soon."
The RBNZ has responded this morning with a statement reassuring the volatility was as to be expected.
"These are not unanticipated or unusual given the nature of the global event, and recent Government announcements on fiscal policy in New Zealand and overseas," the RBNZ statement said.
"On Monday we outlined a number of tools to provide additional liquidity and support to market functioning, including the provision of liquidity to the secondary market for NZ government bonds. We are in close contact with Treasury and other market participants."
The Government's $12.1 billion economic rescue package- announced Tuesday - will be largely funded by new borrowing - which mean issuing new bonds.
"Long-end NZGBs have cheapened enormously," BNZ Smyth said. "We attribute this partly to the increase in government bond supply announced earlier this week by NZ Debt Management."
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While the size of any local QE was uncertain he estimated that $10 billion worth of bond purchases would be necessary by the end of June, but with risks skewed to a higher figure, Smyth said.
On Sunday night the US Federal Reserve launched new QE programme worth more than NZ$1 trillion.
On Monday - as it cut the official cash rate to a record low of 0.25 - the Reserve Bank said its next move was a GFC-style asset-buying programme that would be unprecedented in this country.
The RBNZ has been approached for comment this morning.
Officially called Quantitative Easing (QE) the bond-buying process is also sometimes dubbed "money printing" because it can effectively release large amounts of cash into the economy.
Governor Adrian Orr said he doesn't like the "printing money analogy" as the assets do stay on the RBNZ's balance sheet.
He described the process as "another way of getting cash into the economy, using a different tool."
With the example of government bonds purchases, the Crown would continue to issue debt as usual but the Reserve Bank would buy in the secondary market.
That meant "those banks which are holding bonds know there is always a buyer in the market at a certain price," Orr said.
"The fact that we are there, buying those will keep the interest rate down."
BNZ's Smyth said he believed the programme could eventually be expanded to include Housing NZ and local government bonds "but the immediate focus will be NZGBs".