You areworking for an Australian multinational corporation as a research analyst within the broader area of research and investment. In your position you are responsible for the management and advice on a portfolio of fixed income securities that the corporation invests into.
The corporation is concerned about the flattening yield curve and their effect on the value of bond portfolio. Furthermore, Reserve Bank of Australia (RBA) has announced purchase of government bonds at a rate of $4 billion per week until at least 11 November 20211, thereby indicating protracted low interest rates for the next few years.
The vice president of research and investment would like to consult you on your views, analysis, and suggestions regarding this. More specifically, the vice president is keen to understand the structure of interest rates (or yield curves) that may evolve in the future and the impacts of this on the bond portfolio due to the Covid-19 pandemic.
As a research analyst, you need to draft a high quality well-written report and make an appropriate recommendation to the vice president on your expectations regarding the future term structure of interest rates.
Marks will be allocated on your answers and description of the following points:
1. Rationale for the RBA initiating bond-buying program
2. Do you think interest rates will remain low or increase in the next few years?
3. Will an increase in house prices or GDP growth or inflation force RBA to increase the
cash rate?
4. An identification of the expectations of the level of Australian interest rates in the
future, and how this may, theoretically, affect the value of the bond portfolio
Please provide the ideas and relevant thinking of answering question 2 as detailed as possible.
