RBNZ favours buying more government bonds over corporate bonds, should it expand its Large Scale Asset Purchase next month; Remains open to cutting the OCR next year

RBNZ favours buying more government bonds over corporate bonds, should it expand its Large Scale Asset Purchase next month; Remains open to cutting the OCR next year

The Reserve Bank (RBNZ) is open to expanding its $33 billion Large Scale Asset Purchase programme next month - most likely by offering to buy more New Zealand Government Bonds.

It isn’t considering including corporate bonds in this programme at this stage, but is open to cutting the Official Cash Rate (OCR) below zero next year - should the economy need more stimulus.  

The RBNZ on Tuesday said it will update the “size and scope” of its Large Scale Asset Purchase programme when its Monetary Policy Committee (MPC) has its next scheduled meeting on May 13.

Speaking to interest.co.nz on Wednesday, its chief economist, Yuong Ha, said that in the event of an expansion, the RBNZ would be “primarily” focussed on buying more New Zealand Government Bonds, as it knows Treasury will be issuing more debt.

BNZ interest rate strategist, Nick Smyth, expects the MPC to expand its March 23 offer of $30 billion to $50 billion, based on the assumption the RBNZ will continue to offer to buy up to 40% of what will now be a much larger New Zealand Government Bond market, thanks to all the borrowing the Government needs to do to pay for COVID-19.

Treasury on April 1 nearly doubled its March 17 government bond issuance forecast for the 2019/20 year, to $25 billion, and issuance for 2020/21 is expected to shoot up.

Corporate bonds not a priority

Likewise, with local councils expected to issue more debt at a time nervous investors are trying to sell their bonds to free up cash, the MPC on Tuesday announced the RBNZ will offer to buy up to $3 billion of Local Government Funding Agency bonds as a part of its Large Scale Asset Purchase programme. This represents about 30% of all the Local Government Funding Agency bonds on offer.

Ha said: “Next to government bonds, these are the next best credit risk in the market. If they have trouble issuing, that’s telling you then the stresses are bubbling over into other sectors of the market.”

Ha indicated buying corporate bonds to support monetary policy wasn’t a priority, saying: “Corporate ones are a little bit trickier. I don’t know where we’d go on that one.”

He didn’t rule out buying Housing New Zealand bonds, but noted there weren’t as many in the market, and the RBNZ wouldn’t want to distort the market by snatching them all up.

OCR cuts could be back on the table

Ha said further to buying more bonds, the RBNZ’s next step could be buying foreign currency assets.

While the RBNZ on March 16 cut the OCR by 75 basis points to 0.25%, and committed to keeping it there for at least 12 months, Ha said cutting it further is “probably something that comes back on the table at some point”.

He said the RBNZ had been mindful of giving banks some “breathing space” before going into negative interest rate territory.

Deputy RBNZ Governor, Geoff Bascand, last month said retail banks’ computer systems weren’t ready for this, likening the situation to concerns around systems switching from 99 to 00 at the turn of the millennium.

Ha also noted the role of fiscal policy - or government spending - to stimulate the economy.

What’s the goal?

Coming back to bond buying, Ha made the point: “Not all credit markets are important for monetary policy… It might be important for financial stability functioning, but that’s a different sort of decision-making to the monetary policy component.”

In other words, the RBNZ can commit to buying bonds and other assets to support liquidity and smooth market functioning. IE it can be a bond buyer at a time heaps of bonds are being issued, but investors are trying to get rid of their bonds to free up cash.  

The MPC can also commit the RBNZ to buying bonds should it deem this necessary for it to achieve its mandated inflation and employment targets. IE If the RBNZ supports the market, this helps keep interest rates low, which stimulates the economy.

From the onset of the COVID-19 crisis, the RBNZ has done both - intervened for financial stability and monetary policy reasons.

No economic forecasts expected until May 13

Pressed on why the RBNZ hasn’t released technical papers or more information explaining the rationale behind the unprecedented moves it's making due to COVID-19, Ha said it was trying to be transparent.

He noted the speed at which things have been moving and how quickly data necessary for decision-making was becoming outdated.

He said the RBNZ was trying to be innovative, sourcing more real time data like credit card transactions, bank balance sheet data, information from the Inland Revenue and Ministry of Social Development and internet traffic.

Economists have been critical of the RBNZ, Treasury, Statistics New Zealand and government agencies more generally for not releasing more real time information ahead of regular releases.

The RBNZ will provide economic forecasts (gross domestic product, inflation, employment, etc) when it releases its Monetary Policy Statement on May 13.

The last Monetary Policy Statement was released on February 12 - before COVID-19 really kicked off.

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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41 Comments

14
up

Do you know what the definition of frightened is?
Have another read of the above and see....
"this helps keep interest rates low, which stimulates the economy." No it won't! When is the message going to sink in!

The sovereign five year breakeven inflation rate at 0.06% says the RBNZ's efforts are not even close to stimulation. In fact what's transpired so far has reinforced deflation for those looking ahead. Swapping saver's government bonds for RBNZ reserves does not put bank created credit in citizen's pockets and the businesses supporting their needs. Equally government deficit spending underwritten by bond issuance crowds out those savers that might otherwise consider investing in private ventures.

Apologies for being repetitive, so I'll try to simplify my question. I’m interested in how Treasury will treat the impact of QE operations - central government debt, (a) in the Crown financial statements and (b) on fiscal indicators
1. How will QE gains be treated? e.g., the Crown financial statements show currency issuance as a positive cashflow (financing) and as a liability increase (currency in circulation).
2. Will debt holdings be eliminated on consolidation? QE operations will result in applicable government debts being held as an RBNZ asset and simultaneously 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 ?? or gain?? $5b
(3) Consolidation / elimination entry or not?:
Dr Treasury/DMO: Borrowings $5b
Cr RBNZ: Marketable securities $5b

Repetitive is all we have left to us. There will be no answer to your question. Not one that you will accept at any rate. The only reason I can see for the above is that the RBNZ has been told by larger bodies that "We are ALL going to do this, and you will too, or else" That's the most charitable I can be.
One day in the future these actions will be seen for what they truly are; added, continued, unnecessary damage to a fragile economy, destined to fail. And when they do, God Help New Zealand, because the RBNZ sure didn't.

These questions will be answered when Treasury publishes the March/April Crown financial statements :) But I'd like to know beforehand as their treatment of QE in those accounts will have implications for reported debt levels and other fiscal indicators.

I will need to look in to this. It doesn't answer your questions, but the letter of indemnity from the Finance Minister to the RBNZ re the latest $3b LGFA offer might be of interest to you.

Basically it means the one part of the government owes the other part of the government. And ultimately it never has to pay itself back. See Japan. They've done it for years and inflation is a non issue.

Prior to the Global Financial Crisis (GFC), New Zealand’s major banks had become increasingly reliant on international short-term funding markets. The dangers of that strategy became all too apparent when the GFC led to the virtual closure of those markets, compelling the Reserve Bank and the government to provide liquidity support. The Reserve Bank introduced broader domestic market liquidity measures and the Term Auction Facility (TAF), while the government provided domestic and wholesale funding guarantee schemes for eligible institutions.1

Those measures helped banks to maintain access to funding, but they also carried a cost. They arguably increased moral hazard, affected the Reserve Bank’s balance sheet and burdened government finances with a contingent liability. Measures such as the TAF are also not a long-term solution, as eventually banks will run out of eligible collateral and the central bank would have to accept collateral of decreasing quality. In addition, banks are highly unlikely to view extensive use of these emergency liquidity facilities as a good basis for ‘business as usual’ and may be expected to tighten the terms and conditions on which credit is supplied, with costs to the broader economy. It is therefore preferable to ensure banks are well insulated from liquidity risk.

A recent Bloomberg article described central bank easing with the phrase “pumping money into the economy.” That’s a misconception. Monetary easing is actually an asset swap. The public was holding savings in one form, and now it holds it in another. The Fed buys Treasury securities from the public, and replaces them with currency and bank reserves (base money) that someone has to hold, at every point in time, until the Fed sells its bonds and retires the cash. All monetary policy does is to change the mix of government obligations held by the public. Only fiscal policy – specifically deficit spending – changes the total amount of those obligations. Link

“As an empirical matter, low interest rates are a sign that monetary policy has been tight-in the sense that the quantity of money has grown slowly; high interest rates are a sign that monetary policy has been easy-in the sense that the quantity of money has grown rapidly. The broadest facts of experience run in precisely the opposite direction from that which the financial community and academic economists have all generally taken for granted.”Link

Assessment: This verbose response fails to address the question's substance. C+

I am not responding to your request

Then if you're not contributing, why bother?

Perhaps this is not the right forum for such issues :) Whatever the case, it's clear that one arm of government (DMO) will owe another (RBNZ) money. I expect that these "intercompany" balances will be "eliminated" when the Crown consolidates its accounts. Or perhaps not. This matters because it will dramatically affect the amount of debt Gubmint NZ reports (gross debt at least).

DMO will increase issuance which will sit in the accounts as a liability. RBNZ manages system liquidity and has the balance sheet to buy the bonds (in 2019 they already owned $3bn of Govt bonds). The RBNZ's balance sheet had around $32b of assets in FY19, so their balance sheet is going to more than double over the next 12 months. How is this funded? Some of the money injected through bond purchases will sit in reserve accounts of the sellers so it counts as liquidity reserves. Otherwise they can literally print more cash or issue a term liability against that. So the RBNZ balance sheet is going to increase by >100%

https://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Annual%2...

Correct :) But only for RBNZ's balance sheet. :( ... which is then consolidated into Crown's balance sheet. Treasury first performs a sub-consolidation of RBNZ and DMO, which is then consolidated into the overall Crown's financial statements (i.e., departments, SOEs, crown entities). Along the way duplicated items are eliminated such as: (a) audit fees paid by departments to the Audit Office, (b) capital charges paid by departments to Treasury, and (c) interagency debtors and creditors. So … what will happen to Treasury Bonds now held by RBNZ … will these be eliminated on consolidation?

Ok, so what does it look like at a consolidated level? I'd say they don't net off the bonds and they will report it gross. Some of the bonds will be financed by an increase in deposits with the RBNZ as well. If they net at a crown level, they may as well just cancel the bonds.

You've hit the nail on the head :) Usually, the two would be netted off, but do they intend to act differently?

Treasury and the RBNZ report separately. No consolidation or elimination, just free money. This would normally devalue the dollar but if everyone does the same in equal proportions...

Show me the helicopter money!!!! ...... and pay me interest for borrowing.

I'd like to see RBNZ flattening the curve a bit. The 2033 and later issuances are trading at a considerable higher yield than they have been in the past year vs the 2029 issuance and this steepening is preventing any logical borrower raising longer term funds.

It looks like a great trade to put at the moment if you are a bank. Short the 29s and long the 33s gives you 35bps. Way too rich.

Capitalism is an economic system where government takes a secondary role and is built on private property rights, willing exchange, profit motive, competition and economic freedom.
Far from this we are.

Capitalism and private property etc etc is extremely vulnerable to pitchforks and does best when it allows the state to curb its worst excesses and stabilise things in a crisis. Those salutary prurifying recessions some call for can easily end in revolution and low and behold your Parnell mansion is now housing five families and you're being re educated in labour camp.

Recessions are fundamentally necessary to get capital out of the hands of those who have failed and into the hands of someone else.

We can prevent recessions with central bank funny money and big government spending, but all you're really doing is entrenching unproductive zombie corporations which should have gone bankrupt years before. You're preventing individuals from feeling the panic we all know is necessary to get us off our behinds and doing something new and potentially scary, because that's what the world demands.

The state stabilising things in a crisis is what extended the great depression. It's what we're doing now to extend this crisis rather than let it hit and and let us recover. The pitchforks are coming alright, but not because of too much freedom...

I rather suspect, from the hints in the article, although it is not explicitly said, that RBNZ has been stung by the very pointed critiques (plural) aimed at them by Michael Reddell and Geof Mortlock (also via Croaking Cassandra). Two common themes:

  1. The obstinacy inherent in the RBNZ's refusal to lower OCR below zero for a year (perhaps relenting, now?), when real-world interest rates are still well above OCR plus margin
  2. The complete absence of supporting analysis, papers, models and parameters - which absence makes external review nigh-on impossible.

Both authors make their points with much greater import and technical comment than this simple resumé so in both cases, RTWT.

Thanks for the links and goodreads. I'd only add that the comment re the Taylor Rule and an even lower OCR might best be summed up by:

Central banks may find themselves in a ‘low inflation policy trap’ where interest rates are so low that the further lowering of interest rates will prove insufficient to achieve their inflation targets. In such a situation it will increasingly fall upon both fiscal and monetary policy to be coordinated if an economy is going to achieve its desired inflation outcome. Achieving the required level of coordination potentially relegates monetary policy to simply become another arm of government policy. If this is the case, then it makes it harder to justify ongoing central bank independence. Ironically central bank independence may be the biggest loser arising from their own success in exorcising the demons of high inflation from the 1970’s.

https://www.livewiremarkets.com/wires/neo-fisherism-s-attack-on-the-tayl...

It wasn't all that long ago the reserve bank governor was telling us to go spend spend spend. Feel sorry for anyone who took to that wholeheartedly right now and wishes they had some cash up their sleeve.

Got exactly same thought, it's already dull back then to flog the dead horse, cut OCR by 50, then now by 75 - where's that advise now? with respective to .25 basis left. Last time he said so, on sunny weekend farmers market, with crowd already have uneased mood to spend. Now? on the crumbling platform, rainy day, NO crowd - how to re-word this spend spend spend message? - Answer: the only natural way is to tap in from the previous wealth savings, unproductive assets.. releasing the RE, hold the balloon air until it's pop/burst? or push Banks to gradually 'deflate' it.
Right now, all these bureaucrats collective sub-conscious is to 'hold' as their vested interest is there, self preservation mode, shifted to next generations..QEs, borrow debt more. It can only last to squeeze blood out of a stone. I just finished watching that 3hrs Avenger movie series, End Game. There will be casualties.

Indeed, they all have property. Allowing the natural way you describe does not seem to be high on their agenda. Instead, perhaps the tradition of transferring wealth from savers will be the first resort once more.

When he talks about 'breathing space' he means they are allowing banks time to trim non-revenue generating staff before negative rates kick in.

Monetary policy is useless if there are no credit-worthy borrowers for banks to lend to. No one can afford to pay back a new loan! QE without fiscal policy will only exacerbate the problem, as the private sector loses their bond interest payments. We are at serious risk of a general rent default, debt default, and demand shock causing a deflationary downward spiral. The government needs to spend large, and keep spending, to get money into a private sector that cannot afford to take on any more private bank debt.

Keep this NZ FIRE economy, subscribe to this RBNZ bottomless pit money, ensuring comfy retirement, ensure that if NZ youth cannot support the ageing population, then open the youth migration tap.. signed them into 5-10yrs compulsory service within rest home industries. Post Covids, NZ should be still rosy.. shining place to be in. Already mention to Orr's OCR team.. negative OCR is in the eye of the beholders, rotate the graph to 180degree then you still in positive zone, why jokingly need to rotate that? here's their intelligent answer 'No countries in this planet expect the Covids'.. true, just don't ask them this.. aren't you suppose to prepare? - because the answer will be: how prepare can you be in the plane crash? - you ask again, how about the insurance against it? - grrr.. your circulating the QA sessions around FIRE economy again.. Orr's OCR team cursing,.. corona you!

Indeed. What'll that teach the young people working in rest homes? Don't bother staying home in covid-23?

Get out while you can. This system is pumping absolute nonsense. The more they print, the more they devalue the dollar you earned. A consumer economy fed by financial services? It was always a fantasy. I'll try a few more times. Gold is not an investment, gold is simply money. It's another currency, in fact, it is the currency, that's all there is to it. Check out the price of gold in nz dollars. Check out what happened in 1968 with the london gold pool. Lmba and comex are the same thing. Once they collapse, gold will be free again. Then we will see the real value of fiat currencies, and the money they have been printing will recieve it's actual value. Simply put, if you don't like the rbnz, or the nz govt, or the fed etc etc robbing you of the value of your wealth, then don't let them. There are alternatives. Economists are full of expert words, and devoid of anything the person in the street can understand. All to give the impression they know what they are doing. It's self evident they have no idea, so stop believing, and placing your trust in them. Put your wealth out of the way, and if they make it all work, you can rejoin later. Let them prove themselves first.

Yes. But don't forget to check out what happened to gold in 1980!
I know people who said "If gold EVER gets back to $600 per oz, buy it with your ears pinned back!" ( it was about $800 at the time).
I'll guess that somewhere before it went back blow $300 - more than halved from where they chucked everything at it, they decided to rethink that strategy.
You just never know with gold. Chocolates to boiled lollies etc.
(Gold/SIlver ratio was 50/1 most of last century; 60/1 for the first 20 years of this one. Today it's 110/1. Is silver too cheap or gold too expensive? I guess we'll know in a few years time. Good luck)

Fair point, the manipulation of the gold price is the relevant point here. Once the comex and lmba collapse, then of course, the concern will be that same said forces could rise again. The idea is that a resultant reset of the global financial system, (which has been acknowledged and referred to on this site, by people commenting) will see the complete crushing, in some cases collapse of fiat currencies. And if you accept that gold has been manipulated, then you should also be able to see that what has been done with gold, is relatively nothing compared to what's been done with fiat, with markets, with asset prices, in particular property. Our predisposition to see gold in such negative terms is no accident, it's about the suppression of gold, so that the fed in particular can print endless money, and ensure other central banks follow suit. When the dust settles, I guess we will see. A 10% to 15% allocation of gold is recommended by many fund managers, in the usa, Britain and Europe. NZ and Australia seem to be the ones completely out of the picture regards gold. Dont worry, I may perhaps mention it one or 2 times, maybe with links, and then I'll drop the issue.

"don't let them. There are alternatives." "Put your wealth out of the way..."
I'm actively searching for options here. Suggestions please...?

What is it that the RBNZ etc do not understand about Monetary Policy?

You can FORCE people stop borrowing and spending by putting interest rates up. At some stage 10%, 100% 1000%, people will not be able to service their borrowings and will have to stop their habits. But,

You cannot FORCE people to borrow and spend with lower interest rates! You can lower them and people will clutch what they have left to their chest. Lower them again, and that clutching ( and spending, which is the objective - the much fabled "stimulation") and people will hold onto their money even harder.
Take away some of their saving with negative interest rates at 1% and they'll clutch even harder - it's human nature to protect against a bad winter etc. Make them -10% or more and the harder they'll clutch, and less they will spend.
At 100% (confiscate all their savings - one way or another) and they will have nothing left to spend - or to borrow against.

It's a simple and complicated as that.

I'm going to join the old folks and instead of just clicking the thumbs up, say "Well said!"

And it wasn't so long ago they said negative interest rates would never happen! If you trust central bankers, then great, however, what alternatives to the system do people have? With no alternatives, everyone is completely trapped. That is why I suggest that a research and re-evaluation of gold, and silver and even cryptocurrency could be time well spent. Look at Greece, when the banks failed, they had a lock-in. When the dust settled there, they took a hefty austerity tax out of everyone's deposits, then opened the banks again. The system is designed to be harder to escape, if not nearly impossible. 100% compliance with fiat system makes it all too easy for the central banks to call all the shots, and do what they like, with your money. Alternatively gold, silver etc, are a vote of no confidence in the system. This is a global alternative, people in nz have one of the lowest levels of gold ownership in the OECD. Like the rbnz, which has NO gold reserves. The fed has over 8000 tons, if it was so worthless, why didn't they get rid of it? Truth is, M1 money supply is still backed by gold, albeit at $35USD Per Oz. Yes, that too is a complete accountancy sham.
I am simply trying to suggest that it is worth looking at, to the relatively few, (compared nationwide) that read and comment here, as they seem to be the people actively thinking and discussing the financial fiasco that is currently being experienced and witnessed.

Savers should revolt and throw this lot in prison!

This is unprecedented , its now evident that people holding Government Bonds through asset managers in Money market funds and Mutual funds are now running for the hills and trying to get their money out by liquidating their Gilts

There are simply no buyers , so the Government has to step in .

Its much the same as the Stock Market , except far worse when the Bond Market seizes up , because apart from its size ( The Bond market is way bigger than the worlds entire stock markets combined ) , its the source of cash for Governments to keep it functioning

Was on the verge of buying Kiwi Bonds, to reduce amount held in the bank(s) and therefore at risk of OBR haircut. Are you saying this is a bad idea?