VIEW: RBC "think higher bond issuance is a......>

RBA: VIEW: RBC "think higher bond issuance is a more likely cause of vol. in the

repo market, not because of lower RBA OMO funding, but rather as a function of

repo dealers themselves running up against internal limits. We think term CGS

outstanding will rise from $539bn in Jun '19 to ~$750bn by end-Jun '21, an

increase of $211bn. Thanks to last week's JobSeeker revelations, this is below

our previous expectations which were already lower than most other forecasters.

With $90bn, or just under 20% of the ACGB market currently repo funded, this

suggests an extra $38bn of demand over the next year and a bit, almost twice the

prior largest y/y increase in repo usage, and this is where potential problems

arise. Our base case is that dealer balance sheets will manage to expand to

accommodate this increase, but there could be some frictions in getting there,

similar to those we saw around the sharp supply increases of 2016-17. In the

extreme case, this could force the RBA to restart asset purchases in order to

defend 3yr yield curve target and/or restore market functioning. We see this

risk as quite low for now though. The increased use of tnotes, which aren't

generally repo-funded, has also helped reduce the call on repo funding."