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Treasuries lead rally as Fed and BOJ rain cash across markets

But moves by central banks may not be enough to ease global credit crunch and keep markets functioning

Singapore

TREASURIES rallied after the Federal Reserve slashed interest rates to near zero, leading an effort by global central banks to provide liquidity for stressed markets. Global bonds advanced.

Just hours after the Fed's second emergency rate-cut this month, the Bank of Japan announced plans to buy more corporate bonds and commercial paper, while the Reserve Bank of Australia said it stands ready to buy government securities. Still, the premium to borrow US dollars in some cross-currency markets continued to rise on Monday.

The efforts, coming after a statement on Sunday by major central banks, underscored how the coronavirus pandemic is leading to worries about a repeat of the last financial crisis. The question is whether these moves will be enough to ease a global credit crunch and keep markets functioning.

"They can't allow funding problems and liquidity to seize up in credit markets, which can turn into a financial crisis if left unchecked," said George Boubouras, head of research at K2 Asset Management. "They're desperate to stop it."

Treasury 10-year yield plunged by as much as 34 basis points to 0.62 per cent, while Australia's three-year bond yield dropped six basis points to 0.48 per cent. New Zealand's two-year yield sank by 27 basis points after the central bank slashed its rates by 75 basis points in an emergency move.

While bonds rallied, there are indications that the latest policy initiatives may not go far enough. The dollar-yen three-month cross-currency basis swap, an indication of how much it costs to borrow the greenback, surged to its widest on record, according to data going back to 2011 compiled by Bloomberg.

"The Fed measures make it easy for depository institutions to access very cheap credit, but it is unclear how much this credit easing will extend to corporates and households," said Steven Englander, Standard Chartered Bank's head of North America Macro Strategy.

The Fed's key rate is now in a range of 0 to 0.25 per cent, matching the record low it was last at in 2015. Along with other measures, the US central bank also pledged to boost its bond holdings by at least US$700 billion.

The BOJ, which kept its rates unchanged, said it will raise the upper limit to buy commercial paper and corporate bonds by two trillion yen (S$26.85 billion), while giving zero-interest loans against corporate debt.

The RBA will be conducting one-, three- and six-month repurchase operations for as long as markets needed, it said. It also plans to introduce more policy measures on Thursday.

"The coronavirus crisis is developing into a liquidity issue and the situation in the credit market is turning into a severe problem," said Eiichiro Miura, general manager of the fixed-income department at Nissay Asset Management Corp. "Credit spreads remained extremely wide."

The Treasury market is coming off one of its wildest stretches ever, featuring a dive to record low yields and the widest weekly range in 30-year rates in the past two decades.

It also featured indications of severely impaired market liquidity including wide bid-offer spreads for all but the newest Treasuries, and broken relationships between cash bonds and the futures contracts that reference them.

Following the Fed cut, the potential for US bonds to join the world's almost US$12 trillion pile of negative-yielding debt now looms large. Yields on Treasury bonds expiring in the next three months were getting quoted at slightly negative levels during Asia hours.

"US bond yields are at risk of going to zero, and Australia could test negative levels too," said Shane Oliver, head of investment strategy at AMP Capital Investors Ltd. Central banks "can't do anything to stop the coronavirus from disrupting the economy - it's all about keeping markets functioning as best they can".

The Fed acted aggressively last week to ease strains in the Treasury market through massive injections of liquidity and broader purchases of US securities, in a measure reminiscent of the quantitative easing it used during the financial crisis.

"My initial take is that the QE measures ought to significantly help liquidity in the Treasury market, which has no doubt been struggling of late," said Jonathan Cohn, a rates strategist at Credit Suisse Group AG. "The knock-on effect will be lower rates and significant richening in cash versus swaps and futures." BLOOMBERG