Australian, New Zealand dollars in free fall, bonds crushed by panic selling

[SYDNEY] The Australian and New Zealand dollars tumbled to multi-year lows on Thursday as panic selling swept global markets and stressed investors dumped any liquid asset to raise cash.

The Aussie dollar collapsed 3.5 per cent to US$0.5569 and briefly fell as far as US$0.5510, the lowest since late 2002. It had already dived 3.9 per cent on Wednesday in the largest daily decline in a decade, bringing losses suffered for the week so far to a sickening 9.8 per cent.

Such was the pace of decline that dealers suspected the Reserve Bank of Australia (RBA) might even step in at some point to provide liquidly and restore some order to the market, much as it did during the global financial crisis.

The kiwi dollar dropped 3.4 per cent to US$0.5543, and was quoted as low as US$0.5472, bringing losses for the week to 8.5 per cent.

Traders reported huge strains in bond markets as distressed funds sold any liquid asset to cover losses in stocks and redemptions from investors.

Australian 10-year bond futures tumbled 28 ticks to 98.5400 in the steepest daily drop since late 2016. The implied yield surged to 1.46 per cent, a staggering turnaround from the all-time low of 0.52 per cent hit just eight sessions ago.

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The jump in yields came even as the RBA is widely expected to announce a quarter-point cut in cash rates to 0.25 per cent later in the day, combined with a plan to buy bonds to boost liquidity and keep yields down.

"The bond market is dysfunctional," said Prashant Newnaha, senior Asia-Pacific rates strategist at TD Securities, noting spreads between bids and offers had widened drastically and longer-dated bonds had been swamped by sellers.

"These are not typical bond market moves in a risk-off environment and neither is this dysfunction desired particularly as bond supply is likely to increase, possibly significantly," he added.

The government has already launched one stimulus package of more than A$17 billion to help cushion the economy from the coronavirus, and is expected to announce another soon. All of this spending will be funded by debt.

Mr Newnaha said the RBA might start with a buying programme of around A$20 billion for government bonds, and perhaps A$5 billion of semi-government paper.

REUTERS