Daily Commentary BY THE CURVE TEAM –

Further CLF Adjustments

26th of March, 2021

The Committed Liquidity Facility (CLF) has been reduced yet again, which will have ramifications investment options.

APRA requires ADIs to hold High Quality Liquid Assets (HQLA). Government bonds are classified as HQLA in Australia.

Prior to covid, government bonds on issuance were insufficient for ADIs to meet their HQLA levels. The CLF was introduced to allow other securities to be included as part of their HQLA.

As more government bonds have been issued since covid as the government has ramped up their spending, the CLF has been pared back. Australian Government and Semi-Government securities on issue have risen from $223 billion in January 2020 to $446 billion.

The CLF has fallen from $223 billion to $139 billion in the same time period, with a recent announcement of a fall from $142 billion in February to $139 billion in April.

This may have ramifications if ADIs offload securities that they no longer require as collateral to access the CLF. It could mean these bonds that were used for collateral become available on the market, which would represent opportunities for various tenors in bond markets.

Offshore and supply chains are also under pressure right now with a blockage in the Suez Canal continuing. Oil prices have already risen as a result.

Such events will likely prove transient and ignored by central banks, but nonetheless it will put pressure on inflation, and by extension, the central banks.

Josh Stewart

Associate - Money Markets