Call it a coincidence but the timing from the Reserve Bank was perfect this morning. Just as bank bill rates were continuing to firm past 7% this morning, the Reserve Bank put out a statement which stopped the rise in its tracks.
Bank bill futures rallied, sending yields lower as traders realised that the RBA would suddenly be widening the types of securities it would buy from the market. Ninety day bills rates headed back under 7% to settle at 6.91%.
That had effectively halved the nasty surge from Tuesday when yields were around 6.82%. Coming at a time when the bank’s efforts to flood the market with cash each day to try and arrest the rise in short term rates, the press release was a circuit breaker: for the time being.
Yesterday as bank bills surged past 7% on market estimates that the system would be down $2.5 billion, the RBA injected $2.9 billion in repurchases of bonds and bank bills, and it then left a huge $3.4 billion in the exchange settlement accounts at the end of the day to assure the market there would be enough liquidity for overnight settlements and payments. But still the bills rose.
This morning the market estimated a deficit of $1.09 billion but the RBA again injected much more, with repurchases of bond and bills totalling more than $1.7 billion. It would have also known it would be making the announcement, which came at 9.30am.
The bank said it would be widening the types of securities it was willing to deal in, continuing a trend over the past decade. But it was a decision accelerated with the sudden emergence, and then persistence of the credit freeze since 10 August.
The RBA said the new securities it would deal in would include securities backed by housing mortgages (Australian dollar denominated) or commercial paper issued to finance full doc housing loans in Aussie dollars. It will effectively extend the bank’s ability to provide short term finance from the interbank market, to the commercial bank and non-bank home mortgage sectors.
It will help ease the rising pressure non-bank mortgage rates where the likes of Bluestone have already lifted rates to some borrowers, and the ANZ Bank has warned that there could be another 0.25% rise in rates on top of the bank’s 8 August rise of 0.25%.
It will be short term funding but it will take the pressure off the bank bill market which is where we have seen the credit crunch squeeze rates to a 11 year high yesterday of 7.06%.
And it will also take the pressure off the RBA which has seemed to struggle in the past week to hold down bank bill and cash rates.
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