“These price moves have been absolutely psychotic,” observed one senior trader in Hong Kong on Monday, on another day the local market fell 7 per cent.
Yet the extraordinary volatility in financial markets was as much a result of lack of staff at financial institutions as much as concern that the coronavirus itself will wreck the global economy, he said.
“Large asset managers in London, half of them aren’t there. Central banks in some parts of Europe, they’d normally be buying and selling but they aren’t doing anything,” he added.
The gap between the prevailing bid and offer for Australian government bonds, one of the most liquid markets in the economy, blew out to between 10 and 15 basis points last week, around 10 times the normal gap.
The spread has dropped back to around 6 basis points this week as financial institutions adjust to their business continuity plans and central banks ramp up liquidity-boosting programs.
Selling pressure as investors try to offload government bonds in return for cash has pushed central banks to kickstart quantitative easing programs.
The US Federal Reserve slashed its policy rates by one percentage point and announced it would buy $US500bn worth of government bonds and $US200bn worth of packaged home loans.
The Reserve Bank said it was ready to buy government bonds to mop up the selling, with a further announcement due on Thursday.
After resisting for more than a decade, the RBA looks set to join the large club of central banks that have established quantitative easing programs.
New central bank policies in coming weeks will generate a lot of headlines and new acronyms, but the baton for stimulus has passed to governments.
Central banks are almost dealt out of the stimulus game, their policy rates, and long-term borrowing rates, are already low.
One of the logistic problems with QE in Australia has been the lack of government to buy. That could be about to change.
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