Daily Commentary BY THE CURVE TEAM –

Negative Yield for T Notes

11th of December, 2020

Australia’s short-term debt, T Notes, received a negative bid for the first time yesterday.

A slightly negative bid of 0.01% was accepted yesterday for a 26 March maturity. This is largely a reflection of the very low rates in Australia.

Currently, ADIs can receive 0% by holding funds at the RBA, so it is very unlikely that one of these participants put in the negative bid. It was very likely an overseas bidder, who would be able to make the yield positive using currency swaps.

Around 26% of the world’s investment grade debt is now negative. For governments and companies this is easing financing expenses greatly.

It also creates risks. If central banks increase interest rates, then already indebted companies and governments will feel the pinch. Because of this indebtedness, the central bank will also find it harder to increase interest rates, which could mean if inflation is running hot, central banks will be less able to increase rates as a result.

The ECB overnight increased its funding programme for the Covid pandemic by 50%. The EU also agreed to a $2.2 trillion budget over seven years, which had previously been blocked by Hungary and Poland. Both these announcements will create a stimulatory effect for the economy but add to the aforementioned risks.

In vaccine news, Australia has stopped testing of its UQ vaccine it had hoped would be viable. Britain has begun rolling the Pfizer vaccine out, Canada has approved the Pfizer vaccine and the UAE have approved a Chinese vaccine for use. It is likely more countries will continue to roll out vaccines.

Josh Stewart

Associate - Money Markets