Analysis: Ten Days of RBA Bond-Buying And Market’s Already Hooked
- Published on
- 03 Apr 2020, 10:38 AM
By Sophia Rodrigues
The Reserve Bank of Australia has bought bonds every single day since it began its purchases, inadvertently creating an expectation that it will always be present in the secondary market.
There is also a lack of clarity on which of its two objectives the bond-buying is aimed at on any day, again leading to an expectation that it needs to buy often to fulfil one of its two objectives.
The RBA began its bond-buying auction on March 20, buying A$4 billion of government bonds. Since then it has bought a mix of government and semi-government bonds, with maturity up to 2029 for AGS and 2030 for semis, and for amounts ranging from A$2 billion to A$4 billion.
TWO OBJECTIVES
The RBA began buying bonds via auction in the secondary market to meet its target of 0.25% for three-year government bonds and to flatten the yield curve in line with the three-year target.
The RBA is also buying to support the smooth functioning in the bond market.
On Wednesday, the three-year bond fell slightly below the RBA’s 0.25% target, and there was an expectation that it would either pause the bond purchases or buy towards the longer end of the curve.
But the RBA surprised.
On Thursday, not only did it announce bond buying in the 2024-2027 maturity but also cut the notified amount to A$2 billion.
Strangely, the latter was considered a negative because it suggested the RBA was tapering its bond purchases. It was considered worse than a pause because a taper means buying would soon be halted.
While there was some justification in buying the 2024-2027 maturity because of the steepness in the 3-5year curve, it still surprised the market that was expecting buying further out in the curve.
In the event, the RBA’s buying didn’t lead to any narrowing in the 3-5year spread even though it spent almost 85% of the notified amount purchasing the 2024 and 2025 bond.
Within that the RBA spent 50% or A$1.0 billion in buying just the 2025 bond with an aim of pushing the yield lower but still achieved a cut-off yield of 0.39% which was higher than the day before.
It is possible the RBA’s aim was to smoothen the market by taking stocks from the trading books and allowing them to once again be market-makers. That might explain the fact that buying was concentrated in 2024-2025 bonds.
Analysts at ANZ Bank think this might be the case.
“The steepness of 23s/25s has stood out for some time now as reflecting liquidity conditions that are yet to fully recover. The RBA buying in this part of the curve reinforces the idea that it will seek to address market dislocations in addition to meeting the yield target,” ANZ wrote in a note Friday.
FRIDAY’S ANNOUNCEMENT AWAITED
Market is expecting another bond-buying announcement on Friday.
ANZ expects the RBA to maintain lower purchases like Thursday. But smaller notified amount of A$2 billon may not be the right strategy when the buying is done with dual objectives.
The RBA could perhaps increase the notified amount and focus on the longer end of the curve. Or it could buy semi-government bonds.
What it cannot do is pause its buying on Friday. Not after it “tapered” on Thursday. And certainty not to a market that is nervously waiting bond issuance update from the AOFM.
But a pause is needed maybe next week, and the buying needs to become more random, so the RBA can wean off the market before it gets too addicted to its presence.
--Contact: sophia@centralbankintel.com