Westpac: Reports Suggest The RBA Taper Is In Question

Westpac note that "credible media reports are suggesting that the RBA is likely to rethink its proposed QE taper in light of the current lockdowns. The longer the lockdowns continue, the more damage to the economy, and the more likely that the current A$5bn per week run-rate will be kept beyond the end of QE2 in a couple of months. Given that the RBA would prefer to give market participants plenty of advanced warning, the decision may need to be made and announced following the August Board meeting. Under that timeframe, and on current expectations for the length of the lockdowns, the odds are definitely growing that the RBA will move away from the initial taper. The question is whether or not that will have any major influence on outright yields or the curve? Given how far yields have come, probably not much, although more purchases should support flatter curves and improved semi-spreads, everything else equal. From an outright perspective, yields have already, in our view fallen too far. Looking at the relationship between 10-Year bond yields and long-term cash expectations, the spread is around the narrowest since before the 2013 taper tantrum. Looking at the evolution of recent bear cycles for 10-Year bonds, it becomes clear just how rapid the recent correction has been, although similar price action has previously been evident before the sell-off continued. We think that evolution will again be a feature of the current cycle - eventually."