Australia's ASX prepares for negative interest rate trading

The amount of negative-yielding bonds globally have jumped 47% to more than $12 trillion this year as signs that the Federal Reserve and the European Central Bank will ease spurred a bond rally.

SYDNEY: Australia’s ASX Ltd. is testing its systems for the trading of negative interest rate products, underscoring how markets are preparing for the potential of quantitative easing in yet another Group-of-10 nation.

The exchange has made available external trial environments so market participants can test their own processes for interest rate futures prices that are greater than or equal to 100.00, according to a July 10 statement. The tests will run through to Aug. 9, it said.

Australia’s three-year bond yield slid below 1% for the first time in June, with the Reserve Bank of Australia cutting interest rates twice this year to counter slowing growth. While Governor Philip Lowe has said it’s unlikely that policy makers would need to implement negative rates, some economists have started flagging the possibility should growth stay below expectations.

"With interest rates globally moving further into negative territory, it’s just part of prudent management to do the testing,” said Prashant Newnaha, senior rates strategist at TD Securities Inc.

The amount of negative-yielding bonds globally have jumped 47% to more than $12 trillion this year as signs that the Federal Reserve and the European Central Bank will ease spurred a bond rally. There are no Australian securities with yields below zero percent.

The RBA cut its benchmark cash rate to 1% this month, with Lowe signaling a willingness to ease further if needed. The 3-year bond yield dropped to a record low of 0.883% in June, and is hovering around the 1% mark.

"Due to the declining interest rate environment, ASX has been investigating the impact of zero and negative interest rates on all ASX interest rate products (futures and options over futures) and relevant ASX systems,” the exchange said in a statement.

The ASX24 trading platform currently restricts orders entered in interest rate futures products where prices are greater than or equal to 100.00, while option strike listings are also currently contained to under 100.00. According to its website, ASX’s A$47 trillion ($33 trillion) interest rate derivative market is the largest in Asia.