Mortgage Bond Sales Flood Market

The financial crisis is now in full swing, and credit markets are at the epicentre of current events, as owners of mortgage bonds and other asset-backed securities try to sell billions of dollars in assets, amid reports that there are significant investor withdrawals from these funds.

Bloomberg reported that Funds who buy up bonds of all kinds — from debt of America’s largest corporations to securities backed by mortgages — have struggled with record investor withdrawals amid choppy trading conditions in fixed-income markets. The rush to unload mortgage-backed securities signals that a credit meltdown that began with corporate bonds is spreading to other corners of the market.

Further Federal Reserve support, and other Central bank support is being sought. Raises the question, who should be supporting who, and should financial speculators really be bailed out?

Amid the selling, the Structured Finance Association, an industry group for the asset-backed securities market, asked government leaders on Sunday to step in and help boost liquidity in the market.

In a letter to U.S. Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell, the industry group said that “the future path of the pandemic has significantly disrupted the normal functioning of credit markets.”

The group asked them to “immediately enact a new version of the Term Asset-Backed Securities Loan Facility,” a financial crisis-era program that helped support the issuance of securities backed by consumer and small-business loans. Such a measure, the group said, would help enhance the liquidity and functioning of crucial credit markets.

“The overwhelming supply of securities for sale to meet redemptions has put significant downward pressure on almost all segments of the bond market,” Szilagyi said in the statement.

The sales included at least $1.25 billion of securities being listed by the AlphaCentric Income Opportunities Fund. It sought buyers for a swath of bonds backed primarily by private-label mortgages as it sought to raise cash, said the people, who asked not to be identified discussing the private offerings.

“The coronavirus has resulted in severe market dislocations and liquidity issues for most segments of the bond market,” AlphaCentric’s Jerry Szilagyi said in an emailed statement on Sunday. “The Fund is not immune to these dislocations” and “like many other funds, is moving expeditiously to address the unprecedented market conditions.”

The best way to obtain favorable prices is to offer a wider range of securities for bid he said, declining to discuss the amount of securities the fund put up for sale.

The AlphaCentric fund plunged 17% on Friday, bringing its total decline for the week to 31%.

“We can most likely expect a continuation of price volatility across the bond market spectrum until the panic selling and market uncertainty subsides or government agencies intervene to support the broader fixed-income market,” Szilagyi said

ASIC Re-calibrates Its Regulatory Priorities

In coordination with the Council of Financial Regulators, ASIC will focus its regulatory efforts on challenges created by the COVID-19 pandemic. Until at least 30 September 2020, the other matters that ASIC will afford priority are where there is the risk of significant consumer harm, serious breaches of the law, risks to market integrity and time-critical matters.

ASIC is committed to working constructively and pragmatically with the firms we regulate, mindful they may encounter difficulties in complying with their regulatory obligations due to the impact of COVID-19.  

ASIC has immediately suspended a number of near-term activities which are not time-critical. These include consultation, regulatory reports and reviews, such as the ASIC report on executive remuneration, updated internal dispute resolution guidance and a consultation paper on managed discretionary accounts. Stakeholders will shortly be notified of deferred consultation and publications relevant to them. 

ASIC will also suspend its enhanced on site supervisory work such as the Close and Continuous Monitoring Program.

In issuing information-gathering notices, ASIC has provided new guidance to our staff – mindful that many notice recipients may be facing significant disruption.

By taking these actions, industry participants will be better placed to focus on their immediate priorities and the needs of their customers at this difficult time.

Where warranted, relief or waivers from regulatory requirements will also be provided. This will include requirements on listed companies associated with secondary capital raisings and audits. ASIC has already indicated a ‘take no action’ stance in relation to the timing of AGMs until 31 July and the conduct of AGMs by electronic means.  

ASIC will also work with financial institutions to further accelerate the payment of outstanding remediation to customers.

ASIC will take account of the circumstances in which lenders, acting reasonably, are currently operating when administering the law.

ASIC will maintain its enforcement activities and continue to investigate and take action where the public interest warrants us to do so against any person or entity that breaks the law. However, it will focus on action necessary to prevent immediate consumer harm, egregious illegal conduct and other time critical matters.

Key business as usual functions will be maintained including registry operations and services, receipt of whistleblower, breach and misconduct reports and general contact points for industry.

Harry Dent & Sean Allison LIVE: The Great Crash Begins…

You will recall I have discussed the possibility of a financial crash with Harry Dent in the past couple of years. This was our last show (which now seems very prophetic!).

In these uncertain times, its important to get as much information as possible to make good decisions.

Harry S. Dent, Jr. is a bestselling author and one of the most outspoken financial editors in America who has developed a unique method for studying the global economies and providing insights to what to expect in the future. 

There is an opportunity to join a web event in which Harry Dent and Sean Allison will reveal the latest research on what is about to unfold in the coming months.

According to the promoter, “you’ll get cutting-edge insights based on real research. Insights which you simply won’t find anywhere else – especially not in the mainstream media”. Here is the link for more information.

https://nz561.isrefer.com/go/hdcb/ormn/

Note: Whilst I am sharing this information through my channels, please note I cannot vouch for the content, nor am I getting any financial benefit from sharing this link. But I always find Harry insightful, so thought this might be of interest.

Government Relaxes Responsible Lending Obligations

The government has announced a relaxing of responsible lending obligations as they pertain to business lending, in order to ensure small businesses can access credit quickly and efficiently in the coming months.  Via Australian Broker.

As it stands, responsible lending obligations don’t apply to lending predominantly for business purposes; however, in order for a loan to fall within this exclusion, a lender is required to undertake due diligence to confirm the money borrowed meets this test.

Now, the government is changing this through providing an exemption from responsible lending obligations for a period of six months, in relation to the credit lenders extend to their existing small business customers so long as:

  • There is an existing borrowing relationship
  • Some proportion of that credit is used for business purposes

The exemption will apply to new credit, credit limit increases and credit variations and restructures.

The government recognised the “environment for small business has changed and continues to evolve with the rapidly-evolving challenges posed by the coronavirus”. 

The revision is intended to enable lenders to move quickly to support small businesses, at a time when prompt action has become more crucial than ever. 

Credit providers regulated by APRA will remain subject to APRA’s prudential standards while the exemption applies, and providers who subscribe to an industry code will remain obliged to abide by that code. 

The Morrison Government has promised it will continue to work with the banking industry and the financial regulators to support Australian jobs and businesses moving ahead. 

APRA Advises Regulatory Approach to COVID-19 Support

The Australian Prudential Regulation Authority (APRA) today confirmed its regulatory approach to the COVID-19 support packages being offered by banks and other lenders to their borrowers in the current environment.

Many banks have recently announced COVID-19 support packages that provide affected borrowers with an option to defer their repayments for a period of up to six months. These packages have mainly been offered to small business and home loan customers.

Where a borrower who has been meeting their repayment obligations until recently chooses to take up the offer not to make repayments as part of a COVID-19 support package, the bank need not treat the period of the repayment holiday as a period of arrears. Similarly, loans that have been granted a repayment deferral as part of a COVID-19 support package need not be regarded as restructured.

APRA will be writing to all authorised deposit-taking institutions (ADIs) to advise them of the specific reporting treatment for loans subject to these support arrangements. APRA will require ADIs to report to APRA, and publicly disclose, the nature and terms of any repayment deferrals and the volume of loans to which they are applied. ADIs must also still continue to provision for these loans under relevant accounting standards.

APRA also confirmed that the Coronavirus SME Guarantee Scheme announced by the Commonwealth Government yesterday is to be regarded as an eligible guarantee by the government for risk-weighting purposes.

In addition, we note that the Government’s package launched yesterday included a relation of bankruptcy and corporate government rules, including the protection of directors responsible for companies who, under normal rules would perhaps indicate their businesses would not be viable.

Australia’s and New Zealand Has Fiscal Space To Support Demand

Moody’s says that on 22 March, Australia (Aaa stable) announced economic relief measures, totalling AUD66 billion ($38.2 billion, or around 3% of
GDP) in support to households, businesses and guarantees to small and medium-sized enterprises (SMEs), in addition to a package announced previously and a set of measures aimed at supporting credit.

On 17 March, New Zealand (Aaa stable) announced a NZD12.1 billion ($7.3 billion), or 4% of GDP, stimulus package to provide immediate support to the economy and alleviate the disruption caused by the coronavirus outbreak.

Both governments have indicated that they will adopt further measures amid the rapidly deteriorating global economic outlook.

The measures highlight the strong institutional capacity of both Australia and New Zealand to develop emergency fiscal responses during an unprecedented global shock. The measures also demonstrate a high degree of fiscal flexibility that allows for larger near-term budgetary expenditure without threatening longer-term fiscal strength.

In addition to the previously announced AUD17.6 billion support to the economy, the Australian government plans to spend about AUD25 billion in support to businesses in this and the next fiscal year (the fiscal year ends in June), AUD21 billion in support to households and to offer AUD20 billion of guarantees to SMEs. Measures include a boost to SMEs’ cash flow, with upfront payments, temporary relief on creditors’ claims for financially distressed companies, a direct lump-sum payment to individuals and, specifically, to vulnerable households among other measures.

The New Zealand government will spend NZD6 billion by June 2020, as around NZD5.1 billion of the entire package is allocated as wage subsidies for affected businesses in all regions and sectors. The measure aims to stave off a significant deterioration in the labor market. The government has also announced various business tax changes to alleviate businesses’ cash flow pressures and NZD500 million in additional spending on public healthcare, much of which will go on measures that prevent transmission of the coronavirus in the country.

These stimulus packages come in addition to ongoing monetary policy stimulus in both economies. The Reserve Bank of Australia (RBA) has cut its policy rate by 50 basis points so far in March and offered an at least AUD90 billion (0.5% of GDP) special funding facility to commercial banks, which includes an incentive to increase lending to small and medium sized businesses.

The Reserve Bank of New Zealand (RBNZ) delivered an emergency policy rate cut of 75 basis points on 16 March, in addition to announcing a 12-
month delay to the increase in bank capital requirements, which it estimates will allow banks additional lending capacity of around
NZD47 billion (16% of GDP).

The RBA has also announced a quantitative easing program, aimed at ensuring the yield on three-year government bonds remains around 0.25%, while the RBNZ has left the door open for unconventional monetary policy including largescale asset purchases. {Subsequently Announced].

After accounting for these stimulus packages, Moody’s expects a moderate weakening in both governments’ fiscal positions, with Australia’s
surplus turning to a deficit in fiscal 2020. New Zealand plans to fund its stimulus package with increased debt issuance and a drawdown in cash reserves, pushing net debt above the target range of 15%-25% of GDP.

Beyond these measures, weaker revenue growth because of slower economic activity and the triggering of automatic stabilizers will weaken fiscal balances. Moody’s does not view this near-term budgetary expansion by both sovereigns as significantly threatening their fiscal strength. Indeed, it highlights the flexibility and capacity that both governments possess to utilize fiscal policy to support their credit profiles amid an increasingly difficult global economic environment. Particularly for New Zealand, fiscal surpluses and debt levels below Aaa-rated peers provide ample fiscal flexibility

White House Emergency Request Balloons to $242 Billion

A $46 billion emergency supplemental funding proposal the White House budget office submitted to Congress last week to battle the coronavirus outbreak has ballooned to $242 billion in the Senate amid frenzied negotiations. Lawmakers remain deadlocked on several key provisions.
Via The Hill.

A summary of the supplemental spending legislation provided to stakeholders by the Senate Appropriations Committee says it would provide $75 billion for hospitals, $20 billion for veterans’ health care, $11 billion for vaccines, therapies and diagnostics and $4.5 billion for the Centers for Disease Control and Prevention. 

More than 75 percent of the $242 package — approximately $186 billion — will go to state and local governments, fulfilling a central Democratic demand to bail out cash-strapped states such as New York.

The supplemental would also provide $20 billion for public transportation emergency relief, $10 billion for airports and $5 billion for the Federal Emergency Management Agency disaster relief fund, according to the summary document. 

Other items include $12 billion to the Pentagon, $10 billion in block grants to states, $12 billion for K-12 education and $6 billion for higher education.

The pending Senate appropriations measure is significantly larger than the $45.8 billion request the Office of Management and Budget submitted earlier this week to “address ongoing preparedness and response efforts.”

A huge chunk of the money, $119.4 billion, would go to the Departments of Labor, Health and Human Services, Education and related agencies.

The Departments of Transportation, Housing and Urban Development and related agencies would receive $48.5 billion. 

RBNZ to Implement $30bn Asset Purchase of NZ Govt Bonds

The New Zealand Monetary Policy Committee (MPC) has decided to implement a Large Scale Asset Purchase programme (LSAP) of New Zealand government bonds.

The negative economic implications of the coronavirus outbreak have continued to intensify. The Committee agreed that further monetary stimulus is needed to meet its inflation and employment objectives.

Globally, the number of people infected with the virus has increased rapidly and measures to contain the outbreak have become more restrictive. Global trade and travel, and business and consumer spending have been curtailed significantly.

The severity of the impacts on the New Zealand economy has increased. Weaker global activity is affecting the economy through a range of channels, not just reduced trade. Domestic measures to contain the outbreak of the virus are also reducing economic activity. Employment and inflation are expected to fall relative to their targets in the near term.

In addition, financial conditions have tightened unnecessarily over the past week, reducing the impact of the low OCR on achieving the MPC’s mandate. Heightened risk aversion has caused a rise in interest rates on long-term New Zealand government bonds and the cost of bank funding.

The Committee has decided to implement a LSAP programme of New Zealand government bonds. The programme will purchase up to $30 billion of New Zealand government bonds, across a range of maturities, in the secondary market over the next 12 months. The programme aims to provide further support to the economy, build confidence, and keep interest rates on government bonds low.

The Committee will monitor the effectiveness of the programme and make adjustments and additions if needed. The low OCR, lower long-term interest rates, and the fiscal stimulus recently announced together provide considerable support to the economy through this challenging period.

Record of meeting: Monetary Policy Committee (MPC)

20-22 March 2020

On Friday 20 March the Chair of the MPC spoke with the external members of the MPC by phone to update them on the Bank’s financial stability activities and the interaction with monetary policy. These activities were public. The external MPC members were made aware of what the other members of the Committee were involved in with regard to the Bank’s ongoing support to financial market functioning and stability.

The Chair and the external members also discussed the fact that any further monetary stimulus provided by the Bank would likely be through the purchase of government bonds in a Large Scale Asset Programme (LSAP). All MPC members were also made aware that monetary policy recommendations were being sent to them for a decision soon, and that there would likely be an ongoing series of Bank monetary and financial stability actions as the economic impacts of COVID-19 unfolded.

MPC members received papers on Friday evening containing staff advice about the ongoing deterioration in the economic situation relating to COVID-19.

The initial view of staff was that an MPC decision on their recommendations would be preferable by Sunday 22 March 2020. On Saturday 21 March, following advice from the Reserve Bank’s financial markets team as to their operational and legal readiness to implement a LSAP, the MPC Chair called for an MPC decision to be made by email. An in-person meeting was seen as unnecessarily risky given current official guidance about social distancing.

There was agreement amongst members to proceed in this manner and by Sunday morning there was a consensus MPC agreement to:

  • Provide further monetary policy stimulus through a Large Scale Asset Purchase (LSAP) programme of New Zealand government bonds in the secondary market.
  • The initial scale of the LSAP programme is up to $30 billion of government bonds, across a range of maturities, to be purchased over the next 12 months.
  • Communicate the decision on the morning of 23 March.

This decision was made in response to staffs’ briefing material to the committee indicating the increasing severity of the economic situation and deterioration in financial market conditions.

It was noted that the Government’s fiscal package announced on March 17 has delivered significant spending stimulus in addition to the monetary stimulus announced on March 16. However, the health and safety measures announced by governments over prior days – related to the reduction in travel and large gatherings globally – would add to inflation and employment falling below target in the near term.

Returning inflation and employment to target over the medium term will require support from monetary policy. How much stimulus will depend on how the COVID-19 pandemic progresses and the actions to abate the virus.

The committee considered a range of scenarios, and it was apparent that in light of the evolving situation more stimulus was needed.

Committee members’ attention was drawn to the tightening in financial conditions over the past week. Interest rates on long-term New Zealand government bonds had risen significantly, affecting the cost of wholesale funding for any banks accessing the market at this time. Such increases mean that the reduction in the OCR announced on March 16 was not effectively passing through into interest rates faced by borrowers. The depreciation in the exchange rate had helped ease conditions at the margin but not sufficiently.

The staff briefing material also included updates on global economic developments and other countries’ economic policy responses to the pandemic.

Committee members were advised that the recommendation of a $30 billion LSAP program reflected a current assessment of the maximum effective stimulus achievable while maintaining a well-functioning government bond market. Staff noted the importance for liquidity to remain in the bond market and for multiple market makers.

Staff recommended that purchases up to $30 billion should be spread over at least 12 months and across a range of maturities, in order to leave enough liquidity for the New Zealand government bond market to function effectively. And that the Bank’s communications should emphasise that the LSAP programme would provide confidence and support for the government bond market, and monetary stimulus through keeping longer-term interest rates low.

Members noted that the exact amount of stimulus needed is difficult to quantify, and that the range of economic scenarios they had seen were consistent with a need to deliver significant stimulus.

Briefing material also included information about the implications of an LSAP program to the Reserve Bank’s balance sheet, and about the governance arrangements in place between the Reserve Bank and the Minister of Finance. It was noted that MPC agreement would be sought if further stimulus was needed to be provided, either by increasing the size of the LSAP programme, or through the use of other instruments.

The Committee reached a consensus to:

  • Approve a programme of Large Scale Asset Purchases to a total volume of $30 billion of NZ Government bonds over 12 months
  • Delegate to staff the implementation decisions of the LSAP programme
  • Communicate the program in terms of the total volume to be purchased

Coronavirus Shutdowns Ahead

According to the New Daily, Victoria to close schools and NSW is to shut restaurants, and pubs; and cross-border controls will be in place.

Australia is fragmenting as the coronavirus sees state borders closed and premiers embrace sweeping lockdowns.

In what is confirmation Australians must prepare to face the country’s most extreme virus safety measures to date, NSW Premier Gladys Berejiklian has declared non-essential services will shut down within 48 hours.

Victoria also confirmed just before 3pm Sunday (local time) that schools would shut on Tuesday and there will be progressive closures of businesses such as pubs and restaurants.

Schools in NSW will remain open on Monday, but the premier is likely to make further announcements on education in the days to come.

ACT Chief Minister Andrew Barr announced that the territory would follow the lead of NSW as it was “impossible” to have different arrangements from the surrounding region.

Victorian Premier Daniel Andrews made a similar announcement to the NSW premier, confirming “non-essential” services will be forced to close.

“This is not something that we do lightly,” Mr Andrews said.

“But it’s clear that if we don’t take this step, more Victorians will contract coronavirus, our hospitals will be overwhelmed, and more Victorians will die.”

Supermarkets, petrol stations, pharmacies, convenience stores, and freight service – including home delivery of food – will remain open across Victoria and NSW.

Victorian Premier Daniel Andrews released this statement on Sunday afternoon.

Political leaders are meeting on Sunday night to consider urgent powers that would see citizens banned from travelling between suburbs and in between so-called COVID-19 “red zones”.

“Tonight I will be informing the National Cabinet that NSW will proceed to a more comprehensive shutdown of non-essential services,” Ms Berejiklian said in a statement.

“This will take place over the next 48 hours.”

NSW Health on Sunday confirmed 97 new COVID-19 cases, bringing the state’s tally to 533.

Authorities have still not been able to work out the source of infection for 46 of those cases, but they do know those people became infected within Australia.

The NSW Premier confirmed the strict rules would be rolled out in the next 48 hours.

Victorian cases jumped by 67 overnight and the government confirmed there had been outbreaks in regional areas including Warrnambool and the Surf Coast.

The call to shut down schools goes against the advice from the federal government.

Prime Minister Scott Morrison persisted with the message for the past week that the health advice was that it was best to keep children at school.

The advice from the PM caused widespread confusion among teachers and parents, with many questioning why Australians were told to ‘social distance’ yet send kids to class.

The call by Mr Andrews makes Victoria the first state to officially close classroom doors to stop the spread of coronavirus.

Children in other nations have already stopped going to school.

The Victorian government said it was bringing forward the school holidays.

It remains to be seen whether the ban on physical class attendance will extend into term two.

Meanwhile, South Australia has confirmed it will effectively close its borders in a bid to stop the spread of COVID-19 following an outbreak within a group of tourists travelling around the Barossa Valley.

Premier Steven Marshall announced on Sunday that anyone entering the state would be subject to a mandatory 14-day isolation period.

The measures will take effect from 4pm on Tuesday.

“The health of South Australians is unquestionably our No.1 priority and that is why we are acting swiftly and decisively to protect them from the impact of this disease,” he said.

“We do not make this decision lightly but we have no choice”.

South Australia’s borders will be monitored 24 hours a day and anyone entering the state will be forced to sign a declaration agreeing to self-isolate.

State authorities moved to declare a “major emergency” on Sunday, triggering the shutdown.

But Police Commissioner Grant Stevens admitted authorities were limited in their ability to enforce the isolation orders.

SA Police have been checking on those who have already been ordered to self-isolate after disembarking international flights.

He said authorities were “relying on people’s community and sense of goodwill to do the right thing”, and that overwhelmingly people had been complying with orders.

Similar restrictions have been put in place in Tasmania and the Northern Territory.

In the NT, there are major fears for indigenous communities.