Westpac On What A New RBA Bond Purchase Plan May Look Like

Westpac note that "there are a number of views as to what an upgraded RBA asset purchase plan might look like. The real question is whether they take an RBNZ-style LSAP approach, which has seen asset purchases outstrip supply, or something smaller but constant over a long period. It is the difference between a programme of, say A$75-100bn a year, or something much bigger, such as A$200bn. Or put another way, around A$500mn-1bn a week or up to A$4bn. The latter would be sure to lower yields, by as much as 20bp at the 10yr maturity, although that in itself would create some distortions that might not be ideal. We would favour a less aggressive approach, which would allow more of a market-based contribution to the evolving valuation profile. For that to be the case, we believe the RBA should scale the programme to take some of the excess supply burden away from the market. That could be achieved by buying proportionally relative to supply across the curve. The goal would, in a sense, be to remove any potential negative supply-related "bear steepening" influences, that would work against their policy goals, rather than to achieve a significantly lower yield profile and flatter curve per se."