Analysis: RBA Bond-Buying Via Multi-Price Auction Powerful Price Signal Tool

• Published on
• 19 Mar 2020, 02:54 PM

By Sophia Rodrigues

The Reserve Bank of Australia has embarked on Quantitative Easing using a tool that can be powerful in sending a price signal to the market – multi-price auction method.

This afternoon, the RBA lowered the cash rate to 0.25% as widely expected and announced a start to QE by giving a target of 0.25% for government bonds.

The RBA will buy both government and semis in the secondary market across the yield curve to achieve this three-year yield objective. (Note Deputy Governor Guy Debelle had used the term “objective” when he talked about potential QE).

Most importantly, the RBA will buy government bonds via multi-price auction method, with the size and composition of purchases to be determined based on market conditions and varying across auctions.

The RBA announce its intention at 1115 hours on the day of purchase on Yieldbroker DEBTS.  It will indicate the total face value (AUD) and specific securities it is willing to purchase, the time within which offers are to be submitted (from 3.25 pm to 3.30 pm AEST) and the settlement date (T+2).

All participants will be notified promptly of the success or otherwise of their offers via Yieldbroker DEBTS, the RBA said.

The RBA will publish aggregated results on market data services (Reuters and Bloomberg) shortly after the auction, and on table A3 on the RBA website. These will include the issuer and series, face value and weighted average and cut-off yields for each security purchased. No information regarding the identities of the Reserve Bank's counterparties will be made public.

 

WIDELY USED TOOL BY RBI

Bond-buying in secondary market via multiple-price auction method is a tool the Reserve Bank of India has been using successfully for many years.

It first used the multiple-price auction method after the 9/11 attacks when the Indian bond market was very dysfunctional.

The RBA is unlikely to achieve its objective in the first instance and it will likely take several auctions for market to align to the forward guidance signalled through the 3-year rate. But eventually the 3-10 year spread, for example, will narrow.

If there is one tool that could work to send a price signal it would be this one.

--Contact: Sophia@centralbankintel.com