Quantitative easing: If it looks like a duck …

The Reserve Bank’s version of quantitative easing (QE) could go on "indefinitely", according to deputy Reserve Bank governor Fundi Tshazibana.

Or at least until market conditions return to normal.

By Tshazibana’s description, that will be when bond yields and the spreads between the bid and offer on bonds normalise. Given the unprecedented disruption of the Covid-19 pandemic, that could be a long way off.

Last week’s extraordinary move by the Bank to enter the secondary bond market as a buyer has also divided opinion on whether this is SA’s version of QE — the monetary policy adopted by the US Federal Reserve to increase money supply and boost lending following the global financial crisis that began in 2008.

While the Bank has gone out of its way to say that this intervention is not QE, the market thinks otherwise.

As Intellidex economist Peter Attard Montalto put it: "If it looks like QE, and quacks like QE, it’s probably QE."

The decision was part of a raft of monetary policy and prudential interventions to confront the tsunami effects of the Covid-19 pandemic. The Bank’s primary purpose was to respond to the dislocation that had built up in the bond market before and after the weekend of March 21 and 22.

A case in point was the R186 bond, which matures in six years. The yield had spiked to 12% intraday before the Bank’s decision, and in the immediate aftermath fell 230 basis points to 9.7%. By Friday last week, the yield was back up to 10.47%.

"Asset managers and institutional investors have been under pressure to meet margin calls and redemptions over the last month," says Nolan Wapenaar, co-chief investment officer at Anchor Capital. "By doing this, the Bank is enabling them to sell bonds to meet these commitments, and making the system more stable by doing so." He welcomes the move.

Wapenaar says asset managers have been facing a tide of redemptions as the catastrophic fall in world equity markets has caused investors to flee for the safety of cash.

And with the economy grinding to a standstill as a result of the lockdown, consumers have been accessing savings to tide them over.

"This should calm investors," says Wapenaar. "I still think bonds offer an attractive investment opportunity and yields should continue to recover."

The decision happened to come just before Moody’s cut SA’s sovereign rating to junk.

As is the case with downgrades, the decision is communicated to governments at least two days before the public announcement is made.

Investec investment strategist Chris Holdsworth believes the timing was influenced by Moody’s decision, which could trigger the sales of hundreds of billions of rands in government bonds by foreigners who are not allowed to hold sub-investment grade assets. This would only add more pressure to SA’s bond yields.

"On top of this, the Unemployment Insurance Fund has allocated R30bn for people losing their jobs," says Holdsworth. "The fund has assets of R150bn, most of which is held in SA government bonds. So they would become forced sellers in a market with not a lot of buyers."

Holdsworth’s colleague at Investec Wealth & Investment, Prof Brian Kantor, says the move, if sustained, will both lower the cost of financing for the government and increase the government’s capacity to borrow at a time when it needs to rapidly increase spending to confront the pandemic.

"The pricing in the secondary market informs the bids in the primary market," says Kantor, referring to the weekly bond auctions at which a select group of banks called primary dealers place their bids.

The banks are obligated to buy all instruments sold by the government at any auction.

For Kantor, the move is an alternative route for the government to confront the Depression-era economics it faces as the country’s output collapses and citizens suffer the severe socioeconomic consequences that follow.

"I feel for the people who are self-employed or casually employed — they are going to be hit the hardest," says Kantor. "We have to give them enough money so that they can eat. You can print money as much as you like, it’s a temporary measure until things get back to normal. So this is support for the government as we can’t carry on spending other people’s money."

As predicted by Kantor, the Bank has also moved to lower the capital requirements of banks, which should help them to manoeuvre through an economy in shutdown.

From April 1, the threshold of the arcane liquidity coverage ratio will be lowered by 20%, which will release an enormous amount of capital. That will allow banks to roll over loans to embattled clients without having to set aside more capital.

"I am pleased that the Reserve Bank has recognised the unusual times, and that inflation targeting is, at this point, a distant ideal. It’s about GDP, not inflation," Kantor says.