RBNZ ups its efforts to ensure the debt market operates properly by extending its bond buying programme from central to local government

RBNZ ups its efforts to ensure the debt market operates properly by extending its bond buying programme from central to local government
From left: Christian Hawkesby, Geoff Bascand, Adrian Orr

The Reserve Bank (RBNZ) is continuing to ramp up its efforts to support liquidity and smooth market functioning by offering to buy Local Government Funding Agency (LGFA) Bonds.

The offer opened at noon on Monday and will remain open until “further notice”.

The RBNZ said it’s making a “small scale offer”, but wouldn’t put a dollar figure on it.  

The move is distinct from its March 23 commitment to buy up to $30 billion of New Zealand Government Bonds over 12 months. This decision was made by the Monetary Policy Committee (MPC) to keep interest rates low with the aim of meeting its mandated inflation and employment targets.

The RBNZ’s offer to buy LGFA Bonds on the secondary market is being done for “liquidity management purposes and to support market functioning”.

It therefore complements the announcement it made on March 30 to buy New Zealand Government Bonds maturing on April 15 2020 and May 15 2021.

LGFA CEO Mark Butcher welcomed the RBNZ’s move. He told interest.co.nz: “Markets do go through periods of dislocation, but then they return back to balance again. But you can’t stop borrowing if you’re a large entity if things have shut down...

“This helps give the local government sector some confidence they can still borrow; they can still carry on…

“They [the RBNZ] recognise the public policy aspects of local government and what they have to do as well. It’s important to have an orderly mechanism for borrowing to continue.”

BNZ interest rate strategist Nick Smyth said: “The RBNZ’s decision is a welcome development for the non-government sector of the NZ fixed income market which has come under increasing strain over the past month. 

“Even though the sizes will be small, it signals that the RBNZ is willing to step into the market as a buyer, in an attempt to restore liquidity. This should help free-up balance sheet capacity for dealers, which should, in turn, comfort investors that the market will remain liquid, if they need or want to sell.  

“We see the decision to include just LGFA bonds at this stage as a pragmatic one. LGFA is much larger than any other NZ issuer in the market, with $10.5 billion of bonds outstanding at present ($9.5 billion excluding the soon-to-mature Apr-20 bond), and is a benchmark curve of sorts for the non-government market. It provides approximately 90% of funding to the local government sector. 

“As a ‘quick and easy’ first step into the non-government market, LGFA is the obvious choice. It removes the need for the RBNZ to ‘draw a line’ at this stage, in terms of whether other issuers are included or excluded. 

“At the May MPC [Monetary Policy Committee] meeting, we think the MPC is likely to formally increase the size of its QE [quantitative easing] programme and include LGFA bonds. 

“It is at this point that the MPC is also likely to deliberate on whether to include the bonds of other semi-government NZ issuers, with Housing NZ Ltd one natural candidate. 

“We think market function would need to deteriorate further, and spreads widen, to see the MPC bring forward this decision. QE purchases of LGFA bonds (and possibly other semi-government issuers) would be large-scale, unlike these small-scale financial stability-motivated purchases.”

For a summary of what the RBNZ’s doing to support cashflow and liquidity, see this story written on March 31, and this story with updated news, written a few days later. 

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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34 Comments

Let's just hope that the Local Gubmints borrow for stuff that actually has a long-term useful future. I wouldn't bet the farm on that happening, given their predilections for building Conference Centres, expanding Airports, and then crying poor and No Can Do when the water mains blow and the sewage overflows to the rivers and the beaches. Whoever saw a Sewer Interceptor named after a local dignitary? Yet The Wossname Wing of the NowheresVille Central Function Centre can be found everywhere....

They are borrowing to replace the income streams of joe public that has evaporated. There is no stimulus... just a massive reduction in the products produced - replaced with computer digits.

Printing or borrowing money to buy stuff that is no longer being produced and the pretending we will each have more in hand relies on magic.

The central bank had no choice but to intervene.

Some Local Authorities would have otherwise been bankrupted. It's what happens when they have been socialising the losses, and privatising the profits. And it shouldnt surprise anyone how this has happened. No experience professional politicians and home keepers are now running the show, pampering to the corrupt business people, aid and abated by the yes culture executive and their hand picked clowns below them.

Long gone are the days when Local Councils were administered by respected retired business people; who did it for love and the continued community prosperity, who actually understood balance sheets and profit and loss statements. Now its professional puppeteers, who continue to increase rates to hide the truth. .

And whose fault is that? Seems like more evidence of the selfish baby boomer generation.

Increase the debt for others to pay so you don't have to pay increased rates. It's great while you can.

Our new airport terminal is closed now. But there is a small breather for going to tender for the rugby stadium. Meanwhile we're going to get a patch job on our wastewater treatment plant in case there's new cheaper tech in that space in the future. So defer the upgrade another 10 years.
https://www.rnz.co.nz/news/national/410428/new-plymouth-wastewater-treat...

Is there any evidence that local body bond yields have widened with respect to near maturity government issues?

In short, yes. Feel free to check with any bond trader.

In short, you don't have any?

@audaxes This article has absolutely nothing to do with yields widening on Municipal Bonds , my guess is that the debt markets have seized up as people rush for the door trying to get out of things like money-market funds , and "conservative funds ", which , as it turns our are about as safe a bet as a casino right now .

If the Reserve Bank does not intervene , the whole system based on trust, and nothing else, collapses .

What is certain is that we are not going to get a Municipal Rates"relief "or holiday if there is no money to pay the inflated salaries of all those Auckland Council "executives earning over $200,000 per annum .

"Markets do go through periods of dislocation, but then they return back to balance again. But you can’t stop borrowing..."

The fact an entity can't run a balanced budget for even a short period should indicate how precarious their position is. The market isn't broken, pricing is working exactly as it should.

Since major groans and splintering arose in USA repo market in September 2019, I have envisaged the scene in Titanic, when the flat part of the ship cannot hold the sinking half and the ship begins to split in 2. This shows the current state of credit markets, with world central banks trying to keep the credit markets working. Not that credit markets took too much risk and over-leveraged you understand. No. There wa little risk and nothing to worry about and all of us asking questions were "DGMs". Now the ordure is approaching the fan and Fed and governments will not stop it. Everything is affordable til something goes wrong and you cannot make the payments. And something ALWAYS goes wrong in the real non-linear world

Government expenditure massively up.
Government revenue massively down.
Result: huge deficit. In all countries.
And bond markets (that s the suckers who fund all this debt) we think are just going to suck it all up?
ER? I do not think so

Result: huge deficit. In all countries.

NZ government deficit spending into the banks' settlement cash balance ledger is on it's way to quadrupling from prior no crisis levels.

Those were the days eh.

Nothing screams recovery like more Council spending.

Just like the fed will do, our central bank will buy anything and everything.

I can't wait for the helicopter drops..

The Reserve Bank (RBNZ) is continuing to ramp up its efforts to support liquidity and smooth market functioning by offering to buy Local Government Funding Agency (LGFA) Bonds.

Is this RBNZ intervention frenzy exposing a collateral shortage that is unable to address the claimed liquidity shortage?

Nobody bid at last week's corporate OMO operation. No bid today at the Term Auction Facility after two rounding error bids late last week.

Moreover, how do banking institutions transform their individual QE generated claims to central bank liabilities, better known as reserves, into visible stimulus in terms of actual new loans to business - rather than just letting the rentier class unload their bond positions to further reposition their newly re-acquired savings for non-GDP qualifying asset purchases?

Well, none of them have been here and they're running scared. And, to be honest, they can't do anything else.

But the Titanic analogy is analogous; this is the issuance of deck-chair tokens on a deck which was already sloping. What are they worth? Nothing. The 64.000 chit question is when does the mass-belief in 'growth' and 'return to normal' collapse?

Because five minutes later, so does the whole house of cards.

Just remind me, but from memory the captain and crew go down with the ship? I guess it will be the same in the sense that the elite get the lifeboats while the poor get locked below deck and go down with the ship.

I'm sorry. I just don't see this as good.
We 'bit the bullet' on the health issue - took the hardest of roads, so what scares us so much of doing the same in the financial markets?
To me, it screams "Interest Rates are too low!"(and if we can't see the damage that policy has done then we just don't want to look), otherwise there'd be investors looking to put money into all sorts of Bonds as the return justified the risk (somewhat).
We're going to end up with the RBNZ owning everything, the way we are going, and the Private Sector standing back and letting them take all the risks - liquidity, counterparty and interest rate risks - all of them.
Lunacy, if you ask me. But, hey. It's a brand new world we're heading into and it doesn't look like it's starting well.

Isn't the outside influence of the RBNZ to the debt market ensuring they don't work properly? They're interrupting market forces constantly and wondering why it's all broken and they constantly have to intervene.

Either intervene before it becomes a problem with proper regulations. Or let it fold when it does become a problem. Shoring it up when it's already a massive problem only serves to keep growing that problem until it reaches a point where it's completely screwed.

How will Treasury deal with QE in the Crown accounts? Treat and disclose as seigniorage and eliminate balances?

If so, our fiscal position / operating balances won't look too bad :)

In respect of the RBNZ the purchased assets recognised, as they are, and the opposing balance sheet position as contingent liabilities.

Seigniorage is the profit made issuing notes and coins to banks.

Apparently councils can borrow up to 240% of their asset worth. Wow. And what are council assets? Going to be hard on rate payers.
The amounts that councils had borrowed from 2008 onwards is somewhat ridiculous in itself. A great way to push central govt spending onto local govt. And it worked a charm, even the local councils were caught in the bright lights of wealth illusion. Local govt debt makes up somewhere between 20% to 25 % of the nations total debt, and nobody even took a blind bit of notice. Property values going up meant the rates could be kept to 2% to 3% annual increases, and rates revenue could increase on property values alone. Now the chips are down, and the govt have to take over that debt because it was all borrowed from one Amarican finance company. It's amazing what happens to an economy that is essentially unregulated. Look at boeing and the FAA. Such incredible corruption, and yet in recent weeks, a company that was directly responsible for the deaths of their own customers, which was one short step away from bankruptcy, is first in line for a bail out, as if business had been going great guns up until the virus. These money guys know no bounds, and they're not about to be stopped now.
In a true free market economy, those that owe more than they can pay should be allowed to go belly up.

What are the councils assets? Innit obvious.. its you the ratepayer... well, your back pocket anyway.

LOL - so true.

Articles like this raise more questions than answers, and I am either stupid, or missing something, so here's my take:-

If it looks like BULL , smells like BULL , it is likely you have identified BULL when you see it and smell it .

My guess is that Debt paper and Bond markets have fully seized up , people who have invested through things like Mutual Funds , Money Market Funds (and even Bonus Bonds) are trying to cash-in , and there is simply no cash available to pay them, or no buyers of the paper for the funds to cash-in to pay those exiting the markets wanting their cash.

The whole thing could become a chain- reaction.

If the money market funds or Bond and debt markets are frozen or simply collapse , it will shatter confidence in the whole system , leading to systemic failure .

It would be a worst -case-scenario

"ensure the debt market operates properly"

The debt market WAS operating properly, i.e. pricing (interest rates) moving with risk. These clowns are wrecking the market.

Looks like RBA printed extra 30 billions..
wonder how much RBNZ is printing? No wonder I couldn't get any printer cartridges at OfficeMax!

https://www.stuff.co.nz/national/120866399/wellington-city-council-forec...

"Although the proposed borrowing did not meet Local Government Act requirements, it could be seen as financially prudent under the circumstances.

It would be paid off over 10 years as revenue increased" /uncross fingers

Thanks Audaxes. I’m interested how Treasury will treat the impact of QE operations (a) in the Crown financial statements and (b) on fiscal indicators – i.e., gross/net debt. :)

How will QE gains be treated? I agree with Audaxes that simple seigniorage is the profit earned from issuing coins and banknotes. The Crown financial statements show currency issuance as a positive cashflow (financing) / liability increase (currency in circulation)*.
* Interestingly, the IMF used to classify seigniorage profits as revenue (GFS 1986) but now classify them as a liability under currency and deposits, not as revenue (GFS 2014).

But QE goes beyond physical printing and minting and involves creating money through RBNZ’s open market operations. RBNZ’s government debt purchases will presumably increase money supply, but will this be treated as a seigniorage gain for the RBNZ/government or as a liability? And how will it be disclosed?

Moreover, QE operations will result in applicable government debts being held and treated as an RBNZ asset and concurrently as a Treasury liability. Will these amounts be eliminated in the consolidated Crown financial statements? How will this be treated for net/gross debt etc?

Can anyone explain the applicable accounting entries? e.g.,

(1) Treasury/DMO sells $5b bonds:
Dr Cash $5b
Cr Borrowings $5b

(2) RBNZ buys $5b bonds (QE operation):
Dr Marketable securities $5b
Cr ??? Liability (Currency in Circulation) / Revenue (Seignorage gain) ???? $5b

(3) Consolidation / elimination entry:
Dr Treasury/DMO: Borrowings $5b
Cr RBNZ: Marketable securities $5b