Reserve Bank plonks down another $3 billion on quantitative easing

Tuesday, 7 April 2020

The Reserve Bank has expanded the size of its planned quantitative easing programme by $3 billion with a decision to buy about 30 per cent of the bonds that councils have sold to investors.

The move means the central bank will spend $33b over a year on buying central and local government debt, freeing up cash that the existing owners of that debt can then recycle in lending to businesses and consumers – and hopefully keeping a lid on longer term interest rates.

The Reserve Bank said in a statement that its earlier move to buy $30b of government bonds – which kicked off last week – had been successful in reducing longer term interest rates.

But it said the negative economic effects of the Covid-19 outbreak 'continued to evolve' and there were growing signs of a lack of liquidity in the broader corporate bond market.

Eyebrows were raised this week when the yield on $100m of Sky Television bonds which are due to be redeemed in March next year spiked to 80 per cent, prompting the NZX to write a 'please explain' letter to the pay-televison firm on Wednesday.

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Sky responded by saying it was adhering to its continuous disclosure obligations.

Though Sky's bond pricing appeared an extreme outlier, Hamilton Hindin Greene broker Grant Davies noted on Monday that yields on some other seemingly blue-chip corporate bonds had been trading in the high single-digits.

The Reserve Bank said local government bonds played an important role in determining interest rates faced by firms and households.

They were a 'critical benchmark for non-government credit instruments in New Zealand' and normally the most liquid part of the market, it said.

But the bank said it had observed signs of 'increasing illiquidity and dislocation' in those bonds in particular in recent weeks.

'This could be largely attributed to a combination of the near-closure of global credit markets, domestic intermediaries reducing their participation due to recent volatility, and fund managers liquidating their holdings in order to meet redemptions,' it said.

The Crown had agreed to extend and increase the indemnity it provided to the Reserve Bank to allow for the extra asset purchases, it said.