Analysis: Worried About Upcoming RBA Repo Maturities? Don’t Be

• Published on
• 03 Jun 2020, 07:01 PM

By Sophia Rodrigues

Any worry of a tightening in funding conditions in Australia’s money market due to large repo maturities this month is misplaced because liquidity is expected to get a boost from government spending.

As of June 2, the surplus balances in the Exchange Settlement accounts with the Reserve Bank of Australia fell to A$45 billion from a record high of A$89 billion on April 8.

There are worries that the balances will fall sharply by the end of June because the pace of liquidity injection by the RBA has slowed and big amounts of repos of around A$46 billion are maturing this month.

But such worries are misplaced because liquidity is expected to remain ample and there is even a possibility that ES balances would once again move towards record high.

This is because the government is currently sitting on a huge pile of cash which will be spent over the next few weeks and months. An accelerated borrowing program by the government but a slower pace in spending has led to the huge cash balance.

As of May 31, the government had fixed term deposits totalling $64.2 billion, a record high and more than double the A$30.4 billion at the end of April.

The Australian Office of Financial Management stepped up issue of bonds and Treasury Notes on expectation of big government spending. But despite the downward revision in JobKeeper spending, the AOFM has no plan to slow borrowing and will stick to the update provided on May 22.

LIQUIDITY AHEAD

This is what the liquidity situation could look like in the weeks ahead.

Around A$45 billion is expected to go back to the RBA from repo maturities but there could be at least A$10 billion new repos from the RBA in June.

There’s also some bond-buying from the RBA in the secondary market that the AOFM would have ordinarily done. In the last two months, the RBA has bought around A$3.5 billion, with the biggest one-day buying occurring on Wednesday with purchases of A$630 million.

Liquidity is also growing from the Term Funding Facility being provided by the RBA to banks. As of Wednesday, the funding totalled A$5.83 billion but it is expected to rise at a faster pace in coming weeks.

Interestingly, the decline in surplus ES balances has contributed to an increase in volume of cash transacted in the interbank overnight market. After a few days in May when the RBA had to use expert judgement to calculate the cash rate, volumes have risen in recent weeks to make a calculation possible.

In fact, on four days in the last five, some deals happened at the 0.25% target and while the lowest rate remained at 0.13%, the cash rate was little changed at 0.15%. This, however, didn’t have an impact on Bank Bill Swap Rate where the six-month rate remains around 0.15%.

--Contact: sophia@centralbankintel.com