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Reserve Bank outlines sale process for the bonds it bought as part of the quantitative easing programme at the start of the pandemic

Bonds / news
Reserve Bank outlines sale process for the bonds it bought as part of the quantitative easing programme at the start of the pandemic
9th Jun 22, 9:50am by David Hargreaves

The Reserve Bank's going to start offloading some of the $54 billion worth of bonds it picked up as part of its pandemic-related quantitative easing programme next month.

As the RBNZ originally signalled in February of this year, it's planning to sell $5 billion of these each year back to Treasury - via New Zealand Debt Management (NZDM).

The first sale next month (on July 15) will be of $415 million worth of bonds, and that will be the amount sold every month, other than June, in which the sum will instead by $435 million, to give the $5 billion a year.

On February 23 this year the RBNZ's Monetary Policy Committee (MPC) agreed to start the gradual reduction of the holdings that were acquired under the QE programme, which was officially called the Large Scale Asset Purchases programme, or LSAP.

And the decision was that the reduction of the bond holdings would be done through both bond maturities and managed sales of New Zealand Government Securities to NZDM.

The RBNZ said in a statement on Thursday that reducing bond holdings would provide the MPC more scope to use LSAPs in future. The MPC agreed to hold the Local Government Funding Agency Bonds purchased by RBNZ until maturity, as the holdings of these bonds are comparatively small.

The bonds to be sold will be done so in order of maturity date, beginning with the longest maturity. Shorter-maturity bonds will mature without reinvestment or sales.

"Sales are expected to continue in this gradual and predictable manner, subject to market conditions, until LSAP bond holdings have reduced to zero (expected to be in mid-2027)," RBNZ said.

"The MPC reserves the right to change the rate of sales or halt sales should conditions change, but do not expect such changes to be common.

"The NZDM have been consulted on the sales approach and any impact on net bond supply has been incorporated into their issuance guidance provided in Budget 2022. Bonds that NZDM repurchase from the Reserve Bank will be retired."

The statement said the RBNZ and NZDM wouldl continue to collaborate closely to ensure the efficient functioning of the New Zealand Government Bond market.

"In order to record the intent to proceed on the basis set out in this statement, as well as certain other operational details relating to the sales, the Reserve Bank and NZDM have signed a Memorandum of Understanding," the statement said.

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21 Comments

by  Jonny.Foe  |  9th Jun 22, 10:04am 1654725885

Much ado about nothing. Treasury have a $26.7bn balance in the crown settlement account at RBNZ, so they won't have to issue any new bonds to 'fund' these purchases (from the bank that it is the 100% owner of!) It will be interesting to see how the shuffling around of numbers is shown on RBNZ balance sheets though.  

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by  keithwoodford  |  9th Jun 22, 1:11pm 1654737090

I disagree.  This is an important step in reducing the amount of money sloshing around.  As well as the $5 billion of long term bonds to be retired in the next 12 months, there are also another $7.5 billion of LSAP short term bonds to be repaid over this time.  However, given that there is currently some $48 billion of settlement funds held by the RBNZ (of which $26.7 billion is in the crown settlement account) then the steps taken by the RBNZ do seem very tentative.  Prior to the 2020/21 LSAP program, total settlement funds were typically about $8 billion.

KeithW

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by  treadlightly  |  9th Jun 22, 2:01pm 1654740103

Only taxation can destroy the governments currency. Whether currency is held in the form of reserves or bonds only affects interest rates and not the quantity on issue. As economist Larry Randall Wray states "bonds are just reserves that pay a higher rate of interest". https://www.levyinstitute.org/pubs/Wray_Understanding_Modern.pdf

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by  Jonny.Foe  |  9th Jun 22, 4:16pm 1654748181

there is currently some $48 billion of settlement funds held by the RBNZ (of which $26.7 billion is in the crown settlement account)

I don't think that is correct Keith. Govt have a balance of $26.7bn in the Crown Settlement Account and commercial banks have institutional settlement account balances of $47.2bn (https://www.rbnz.govt.nz/statistics/r3). The former is not part of the latter. Both balances are separate liabilities of RBNZ.

When Treasury 'buy' $400m worth of bonds from RBNZ, the Crown Settlement Account balance will reduce by about $440m (covering indemnity) and the LSAP assets held by RBNZ will reduce by $400m (and indemnity will reduce a bit too). RBNZ balance sheet will deflate - with both assets and liabilities reducing by about $400m. Overall Govt liabilities will be unchanged.

My 'much ado about nothing' comment is because the amount of 'money sloshing around' in the economy will not change a dollar as a result of the chosen approach to unwinding LSAP this year. Govt could, as you note, buy back $20bn of bonds tomorrow using its Crown Settlement Account balance and still have a healthy balance (relative to historic norms). To actually reduce the amount of money sloshing around the economy requires two further steps:

  1. Commercial banks to use their grossly inflated Institutional Settlement Account balances to purchase some shiny new bonds from Treasury (reduces Institutional Settlement Account balances and increases Crown Settlement Account balance)
  2. Commercial banks would then need to sell the newly purchased bonds into the secondary market - draining some cash out of the economy.

My personal view is that Govt bonds are actually highly liquid assets - not that difference to cash really. But, that's a separate point.   

 

 

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by  keithwoodford  |  9th Jun 22, 9:26pm 1654766769

Jfoe

You are correct.

The Crown settlement account contains $26.7 million and the bank settlement accounts contain $47.5 million. A total of 74.2 billion. [There is a slight discrepancy between the website and the underlying spreadsheet, possibly a typo on the website, but it makes no difference to the big picture.] 

In contrast, at the end of 2019, before COVID and the QE, the crown settlement account contained 3.0 billion and the bank settlement account contained 7.5 billion. A total of 10.5 billion.

That extraordinary shift, from approximately $10 billion to $73 billion, illustrates that the settlement accounts are awash with money.  It is a direct consequence of the QE/LSAP with the RBNZ using those terms as synonyms.

And while those settlement account are awash with money, then inflation will be very hard to bring under control.  And even then, the flames of inflation will easily fire up again if those accounts are awash.

What we have seen over recent months is that the Crown settlement account has been declining but the bank settlement accounts have been correspondingly rising. The combined total has been around $74 billion since the LSAP program came to a halt mid 2021.

If the RBNZ now sells its long-dated bonds back to the Government, and these bonds are then retired as consequence thereof, then as you say, both the assets and the liabilities of the RBNZ will decline but the equity position will essentially be unchanged.  However, the Crown settlement  funds will decrease and the combined Crown and banks settlement funds will also thereby decrease.

In the short term,  nothing much else will change. But eventually, as this process continues, and as long as the Government continues to run deficits, then the Government will be forced to offer new bonds to the market.  

In contrast, as long as the Crown settlement account remains with a high credit balance, then the Government can continue to spend and thereby increase economic demand using the RBNZ-created funny money. And that is highly inflationary. The bank settlement accounts will increase as money will slosh back and forwards between the individual bank settlement accounts with nowhere else much for it to go. 

The RBNZ knows that it has to reduce those funds sloshing around. And it has to get to a position where it forces the Government to fund its deficits through the open market. But it cannot get to that point until the Crown settlement funds are brought back down to traditional requirements necessary for day to day liquidity.

As it stands, it would take about $20 billion of short and long term Treasury bonds to be allowed to mature (for short term bonds) or sold back to the Government  (for longer dated bonds) so that the Government would then have to fund its deficits by going to the open market.  In my opinion, this is the point that the RBNZ needs to get to asap.   At that point it can probably allow the remaining LSAP funded bonds to mature naturally, although that issue will need to be looked at gain in another year's time.

The RBNZ has dug itself a big hole by totally overdoing the QE. Fortunately for the RBNZ, the velocity at which money was circulating also declined during the pandemic, because investors could not work out where to spend their credit balances. Otherwise inflation would be even worse, with lots of money floating around and nowhere for it to go.  

KeithW

 

 

 

 

 

 

 

 

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by  Audaxes  |  10th Jun 22, 9:57am 1654811840

In contrast, as long as the Crown settlement account remains with a high credit balance, then the Government can continue to spend and thereby increase economic demand using the RBNZ-created funny money. And that is highly inflationary.

Recent Crown Settlement account balances reflect the extraordinary level of prior debt issuance undertaken by Treasury that has been monetised by bank syndication and tenders.

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by  treadlightly  |  10th Jun 22, 2:41pm 1654828911

Lets also not forget that it is the commercial banks which create the majority of our money through their lending as explained by the Bank of England  and confirmed by our own Reserve Bank. Why do mainstream economists always fail to recognise this fact?

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by  Feijoa  |  9th Jun 22, 3:09pm 1654744198

Selling low yield bonds in a high interest rate environment … what could possibly go wrong with that galaxy brain strategy?

I’ll hate to see how much of a bath we take on offloading these at discounted prices. 

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by  Pragmatist  |  9th Jun 22, 3:21pm 1654744881

Govt's Left pocket is selling them to govt's right pocket..  hardly an open market transaction.

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by  keithwoodford  |  9th Jun 22, 3:30pm 1654745426

It is not meant to be an open market transaction. 

KeithW

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by  The Black Swan  |  9th Jun 22, 3:37pm 1654745869

 

 

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by  The Black Swan  |  9th Jun 22, 3:42pm 1654746155

QT, Kiwi style. Liquidity vacuum goes into 2nd gear.

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by  Greg-Hamilton  |  9th Jun 22, 7:10pm 1654758620

Naive question and my understanding of this numbers game !

 

  • These are the bonds RBNZ bought from Govt
  • Now RBNZ are selling it ( To whom ? )
  • If no buyers available, what will happen ?
  • Will its price be $5Billion or changed with rising interest rates regime ?

Thanks in advance ! :-)

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by  keithwoodford  |  9th Jun 22, 9:24pm 1654766663

Greg,

1) the bonds came from the Government as Treasury bonds but with non-government financial institutions acting as intermediaries and clipping the ticket at that time.

2) The RBNZ is now selling the bonds directly back to the Government (without an intermediary).

3) The Government will buy them. No doubt about that. It has been agreed.  The alternative would be for the RBNZ to sell directly back to the open market, and the Government does not want that. 

4) The price will be less than the value on the token. So the RBNZ will make a loss. But the Government will pay the RBNZ less than what they received when they originally floated the bonds. And these will approximately balance out after taking account of the historical intermediation and any insurance costs.

KeithW

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by  Audaxes  |  10th Jun 22, 10:24am 1654813458

4) The price will be less than the value on the token. So the RBNZ will make a loss. But the Government will pay the RBNZ less than what they received when they originally floated the bonds. And these will approximately balance out after taking account of the historical intermediation and any insurance costs.

Treasury will pay enough to extinguish the bank reserves lodged in the settlement institution accounts that represent the RBNZ purchase price of the bonds offered by authorised banks etc at the time of each QE/LSAP transaction - which in all probability will be above the issue and par redemption price of each security.

Hence the claim - - Rising interest rates could see government suffer a $5 billion loss from the Reserve Bank's QE programme

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by  keithwoodford  |  10th Jun 22, 11:40am 1654818009

Note as per the article at your link that the loss represents the indemnity provided by the Government to the RBNZ.  It is a case of Peter paying Paul (or Grant paying Adrian) with all parties being part of the State. There are no flows to anyone outside of the State boundary.

KeithW

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by  Audaxes  |  10th Jun 22, 12:24pm 1654820665

The banks will be in receipt of what I claim, which will be used to simultaneously extinguish their deposit liability to the government (Crown settlement account), incurred at prior Treasury syndicate/tender bond pricing events. The former will have a higher $value than the latter - hence the government indemnity to realise this bank gain.

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by  treadlightly  |  10th Jun 22, 3:43pm 1654832585

It is a contradiction in terms to talk of the RBNZ selling to the government as it is a part of government and on the same side of the balance sheet. Treasury should not be involved in issuing debt in the first place as it is an interest rate mechanism and so should be left for the Reserve Bank to administer. It is mostly a charade to give the gullible the impression that the government is dependent upon the private sector for the financing of its expenditure.  https://clintballinger.com/2018/11/13/decouple-spending-from-bond-sales/

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by  Patto  |  10th Jun 22, 10:42am 1654814531

Treasury has added $5 billion to each of the next three-year bond selling programs, specifically to raise funds to buy back RBNZ holdings. It seems they regard the existing $26 million held at the RBNZ as already allocated or needed to retain a buffer. Basically, what happened with LSAP/QE was that the RBNZ purchased about $50 billion bonds off the market at an average rate of around 1%. At a government level, that effectively cancelled a similar amount the Treasury had sold at those cheap rates. Now Treasury has to replace that funding at rates 3%+. So, while there won't be any "loss" as such showing up in government accounts, there is circa $8 billion in opportunity cost.

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by  keithwoodford  |  10th Jun 22, 11:57am 1654819061

Yes, the $26 billion will continue to decline as the government uses this for its current operating deficit. And that decline will be essentially balanced by an increase in the settlement accounts of the non-government financial institutions. 

However, as the Treasury bonds held by the RBNZ either mature or are retired, with this being financed as necessary by the Govt issuing new bonds in the open market, then the net effect is that money will be removed from  the system (QT), and settlement account totals will decline.   

The RBNZ wants to do this QT now so it has the potential to do more QE if necessary at a later date. And that thought  is real scary. 

KeithW

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by  Patto  |  10th Jun 22, 12:15pm 1654820150

If the Treasury/RBNZ wanted to reduce bank settlement balances quickly, thereby removing liquidity from the system, they could have exchanged the bonds they are buying from the RBNZ with Treasury bills (or simply tell the RBNZ to invest the proceeds from their sales into T bills). RBNZ could then sell down the T bills to the banks. This would have minimal impact on the yield curve, certainly a lot less than the RBNZ selling bonds to the bank.

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