Analysis: RBA Buys Short-End Bonds Again But 3-Yr Remains “Tight Spot”

• Published on
• 27 Mar 2020, 04:34 PM

By Sophia Rodrigues

The Reserve Bank of Australia bought a huge A$1.8 billion of three-year government bonds at the auction Friday but the cut-off yield was still higher than the 0.25% target, indicating there continues to be dislocation in the market.

At the auction Friday, the RBA bought the entire notified amount of A$3 billion in the 2021 to 2023 maturity. It sold A$1.8 billion of April 2023 bond at a cut-off yield of 0.2775% and weighted average yield of 0.2828%.

Both the cut-off and weighted average yield point to illiquidity in the market currently, and it was to ease such “tight spots” in the market, the RBA decided to focus at the short end for the second day in a row.

On Thursday, the RBA bought A$893 million of the same April 2023 bond at the same cut-off yield of 0.2775% but a marginally lower weighted average yield of 0.2794%

The rest of the purchases were:

--A$521 million of 5.75% May 2021 bond at a cut-off yield of 0.2550%.
--A$37 million of 2% December 2021 bond at a cut-off yield of 0.2550%
--A$64 million of 5.75% August 2022 at a cut-off yield of 0.2725%
--A$619 million of 2.25% November 2022 bond at a cut-off yield of 0.2625%.

The RBA is currently focusing on the short end to ensure smooth functioning of the market and to achieve its three-year yield target of 0.25%.

There may be an additional reason to buy short-end bonds. The RBA is doing the government bond buybacks that the AOFM has ceased to do. If it were buying back bonds now, the AOFM would have typically targeted the 2021 to 2023 bond maturity.
 

--Contact: sophia@centralbankintel.com