Bureaucrats speculating on bonds
By Justin Pyvis – Delivered on 18 Nov 2021

Good morning! Other than the ongoing COVID-19 lockdown in the NT (8 new cases), most of the pandemic news yesterday came from across the ditch where the Kiwi government finally unveiled its vaccine passport, creatively named "My Vaccine Pass".

The pass will be required for concerts, music festivals, bars, restaurants, the gym and sports events. Although it hasn't been officially confirmed, it may also be used to control movement within New Zealand, e.g. allowing fully vaccinated Aucklanders to leave the region, given the government plans to reopen the country to domestic, vaccinated travel from 15 December (just in time for Christmas! 🎉).

Perhaps as a sign of what's to come, the pass is only good for six months from the date of a person's second jab, meaning "a booster shot may be needed to keep a vaccine pass current".

Fully vaccinated population (aged 16+)


Please note that from today we will only track the vaccination status of people aged 16+, as that's what the Department of Health reports and is the threshold used by most governments for setting policy.


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Note: Brent oil, gold bullion and iron ore prices are the second futures contract. Bond yields are 10-year Treasuries. The S&P500 is a snapshot 30 minutes before close.

At the time of writing the US S&P500 was 0.14% weaker after US housing starts unexpectedly fell 0.7% from a month earlier in October, its lowest level in 6 months. However, permits for building jumped 4.0% suggesting there's still support for new home construction in the coming months.

Locally, the ASX200 declined 0.68% after large falls in the financial sector (-2.7%) were triggered after the Commonwealth Bank (-8.1%, its largest ever fall) warned that ultra low interest rates were causing "considerably lower" loan margins in the quarter, potentially denting future earnings.


Recovering: Wages in Australia grew 2.2% in the September quarter from a year ago, according to the latest ABS data release (so minus 0.8% in real terms, given inflation was 3.0% in the same quarter). That won't be enough to spook the RBA into changing course, given it wants to see wages "growing at 3 point something per cent to sustain inflation around the middle of the target band".

Rate hike incoming: Following the robust labour force data on Tuesday, the UK Consumer Price Index hit 4.2% in October, an almost decade-high increase that was above consensus expectations for a 3.9% rise and more than double the BoE's target of 2%. Even core inflation – which strips out energy and food – increased 3.4%, with punters backing in a rate hike from here as the UK pound hit a 21-month high against euro.

Canada inflation: Inflation in Canada hit an 18-year high 4.7% in October. All eight components increased in price, led by transportation (10.1%) as a result of higher fuel prices. Higher inflation forced the Bank of Canada to end its bond buying programme early last month and signal interest rates could rise as soon as April.

Dove or hyper-dove?: US President Joe Biden said he would make a decision on who will be the next Federal Reserve chairperson "in about four days". The contest is between incumbent Chair Jerome Powell and Lael Brainard, a Fed board member regarded to be even more dovish on monetary policy than Powell.

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Bureaucrats speculating on bonds

Former Kiwi central banker Michael Reddell penned an interesting explainer on the Reserve Bank of New Zealand's (RBNZ) foray into quantitative easing (bond buying) yesterday, concluding that the taxpayer has assumed "quite a lot of risk... [and] any useful bits must have been concentrated in a few months last year".

Breaking it down: As at the end of October, the RBNZ had lost $NZ5.7 billion (~1.6% of GDP) on its bond buying programme as a result of rising yields along the curve. While the bank can hold the bonds to maturity leaving "little or no claim under the indemnity (depends on the initial purchase price relative to the face value)":

"...if things play out as current market prices envisage, the OCR would rise by quite a lot and (on average) stay much higher over the remaining life of the portfolio. Since the Bank is still holding the bonds, settlement cash would also stay high, and the Bank pays the full OCR on all settlement cash balances. Under that scenario, the Reserve Bank – having issued lots of floating rate debt, and having no matching floating rate asset – will be up for much higher interest costs."

Essentially, while holding to maturity mitigates the accounting loss, it reduces future dividends to the government. While market interest rates could also fall and "they could make us a bit of money", Reddell believes that "there is no obvious reason to have some bureaucrats speculating on bond markets... there seems to be no effective accountability, for activities which – at this point, well beyond the crisis – is simply not a natural business of government".

Why this matters: The Reserve Bank of Australia (RBA) still runs its own version of this scheme, which is so far worth ~12.5% of GDP. For sake of comparison, the RBNZ ramped up its purchases to about 15% of GDP before it was abandoned back on 23 July, a ratio the RBA will surpass if it continues to purchase bonds at $A4 billion a week until February 2022 as planned.

It's likely that the RBA has lost a similar amount (marked to market) as the RBNZ in percentage terms but far more in absolute terms – it had already lost $A4.7 billion on the programme as at the end of June (before yields really started to rise) and unlike the RBNZ, it's still buying.

Leaving aside the dubious merits of such bond buying programmes to begin with, it means bureaucrats at the RBA are effectively speculating on bonds worth somewhere around 15% of Australia's GDP.

Looking forward: If the bureaucrats at the RBA are wrong and yields continue to rise, as markets currently expect – unlike the RBNZ, the RBA has pledged to hold its purchases to maturity – the government (taxpayer) will be on the hook for billions of dollars in losses in the form of reduced dividend payments, for at least a decade (the longest-dated bond the RBA owns matures in 2032).

As Reddell notes, the government could "probably have funded quite a few ICU beds for quite a few years with that sort of money... but it has gone".

The Wrap Up
    👮‍♂️Former federal Labor MP Craig Thomson was arrested after being charged over his "alleged involvement in a multi-million-dollar migration fraud".
    🌐Speaking of federal Labor, it made its first major policy announcement in the lead up to the election, pledging to spend $A2.4 billion upgrading the national broadband network.
    👷‍♀️According to a new survey, the average Australian has worked 1.5 hours more unpaid overtime each week since COVID-19 struck.
    🏅"The Biden administration is still weighing how to approach the upcoming Beijing Winter Olympic Games, including the possibility of a diplomatic boycott".
    ☢️Billionaires Warren Buffett and Bill Gates will build a new small (similar to a submarine's reactor) nuclear power plant in a remote Wyoming town, "designed to be faster and cheaper to build, and safer to run, than traditional large-scale reactors".
    🐭Hong Kong's Disneyland was shut down yesterday after a visitor tested positive for COVID-19, with the government requiring all staff and visitors to get tested.
    ⚱️Usman Khawaja and Travis Head were recalled to the Aussie squad ahead of the Ashes and will compete for Matthew Wade's vacant #5 spot in the line-up.
    🚶‍♀️The Australian word of the year for 2021 was "strollout", use to describe the stroll-like pace of the nation's vaccine rollout.
    The Perth Heat became the world's first professional baseball club to accept Bitcoin payments, and will pay its players and staff in the cryptocurrency.
    🥊Australian boxer Tim Tszyu won a comfortable unanimous points decision against Takeshi Inoue to keep his world championship hopes on track.
    🏟️The LA Staples Centre will be renamed the Crypto.com Arena "in a $US700 million deal" rumoured to be over 20 years.
    👩‍💻The German Ministry of Information Security – quite literally the country's foreign intelligence cryptographic department – was asked for its public PGP encryption key but accidentally emailed its private key instead.
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