Meanwhile, with little or no room for rates to go even lower, QE is back on the agenda in Europe and being speculated about elsewhere.

In September 2019, the European Central Bank (ECB) responded to economic headwinds by restarting its asset-purchase programme (APP) and cutting its deposit rate by 10 basis points, to -0.5 per cent. The result may be that European FIs focus more of their funding on their domestic market. Meanwhile, the interminable low-rate environment could put further margin pressure on FIs.

Asad Husain, director, European FIG origination at TD Securities (TD), says: “Investors are wary of NIM [net-interest margin] pressure on banks from negative rates but have not been deterred from buying so far. This has been a reality in Europe for several years now and banks have still managed to perform. Some of the cost-cutting measures and technology investments they have made are now beginning to come to fruition as well.”

The tiering system introduced by the ECB to exempt some of banks’ excess liquidity holdings from the negative deposit-rate facility should further help allay NIM concerns.

The latest round of ECB stimulus is also much smaller than previous APP iterations, at €20 billion (US$22 billion) per month. Around €5 billion of this is expected to be directed to the private sector through purchases of covered bonds, corporate bonds and asset-backed securities.

Direct support will be given to FIs through the purchase of covered bonds. All else being equal, spreads in other FI products should compress too as investors move out on the risk spectrum to get return.

However, in a research note published on 8 October 2019, TD’s London-based senior European rates strategist, Pooja Kumra, argued that the stimulus should not be large enough, in the context of the European market, to cause significant moves in yields – higher or lower. Kumra estimates that €1.6 billion of the monthly investments will be made in covered bonds.

Meanwhile, what were relatively high official interest rates with forecast hikes in Australia and the US have now been brought closer to global norms via three cuts each from the Reserve Bank of Australia (RBA) and Federal Reserve (Fed) during 2019. Both central banks expressed concern in the main about the potential malign influence of a slowing global economy.

Speculation has been rife in the Australian market as to what a local version of QE might look like, given the RBA may only have one further cut up its sleeve thanks to a cash rate that has already been cut to 0.75 per cent. The RBA itself maintains that QE is an unlikely scenario to play out.

Yuriy Popovych, director, international fixed income origination and syndication at TD, characterises the RBA as a reluctant cutter but acknowledges the prospect of lower rates and even QE in Australia. He says this would likely see some international investors move away from Australian dollars but could also further increase the appetite of domestic investors for higher-yielding products.

The Fed cut its target funds rate to 1.5-1.75 per cent at its October meeting, but set a high bar for further easing. However, TD analysts Priya Misra, Gennadiy Goldberg and Oscar Munoz stated in research published on 1 November 2019 that they expect 75 basis points of further easing in H1 2020 as the “economic outlook continues to gradually soften on the back on anaemic global growth and lingering trade uncertainty”.