Bank’s purchases of state bonds tops R1bn
Deputy governor Tshazibana tells of possible further action to boost financial-markets liquidity
The Reserve Bank has bought just over R1bn in government debt securities since it announced a bond-buying programme in March to boost liquidity in financial markets reeling from a sell-off caused by the coronavirus outbreak.
The central bank, which announced its plan on the eve of the imposition of the 21-day lockdown, upped its holdings to just more than R9.2bn from R8.1bn in February, according to data released on Tuesday.
The purchases would have been made in the period soon after the Bank announced it would start the asset purchase programme, deputy governor Fundi Tshazibana told Business Day on Tuesday.
On March 25, the Bank stepped up efforts to inject liquidity into local financial markets, which had been showing signs of stress amid the economic fallout of the coronavirus, seeing investors scrambling for cash and fleeing to safe haven assets.
These measures included the announcement that the Bank would begin buying government bonds in the secondary market — from banks and asset managers — after buyers for government bonds dried up and 10-year yields skyrocketed to records above 12%, from less than 9% in February.
The purchases were likely to rise if conditions demanded that the Bank must continue to add liquidity to the market, Tshazibana said.
Any breakdown in the bond market would have serious implications for the government’s ability to raise funding for its spending commitments.
By the Bank’s own calculations, SA is facing an economic contraction of anywhere between 2% and 4% this year, due to the lockdown, which will collapse tax revenue and force it to increase the amount it raises in the market.
According to the Bank, the government deficit could rise to 10% of GDP, levels not seen since World War 2.
The amount of bond purchases thus far is, however,
small considering that the Treasury has to raise about R1.1bn a day to fund its spending requirements, Business Day previously reported. The overall market is estimated to be more than R2-trillion.
Tshazibana said that “for now” the Bank’s own assessment, as well as that of private institutions it had dealt with, was that its actions had been sufficient to restore order. But she stressed that this could change, as the market responds to a host of factors, including the effect of the recent downgrades by ratings agencies Moody’s Investors Service and Fitch Ratings, as well as global risk appetite.
“When we have spoken to market participants, and from our observations of how the bond market is functioning right now, we think that there is a sufficient level of buyers and sellers,” she said.
“And that was the primary reason why the Bank intervened. For us, it’s not about the price, it’s not about yield levels. We are there to ensure that there are sufficient volumes on the sell side and on the buy side.”
The Bank would not disclose which bonds it had bought or how much, she said, nor would it outline the extent of the asset purchases it intended to make.
But it did have an internal target it was working towards, she said.
“It’s important for us that, as much as we are accumulating these assets, that when we need to drain liquidity, we are able to drain liquidity without putting additional strain on financial markets as well,” she said.
Though the Bank has maintained its intervention is not intended to steer prices, its actions did help lower yields after the step was announced.
The yield on the R2030 bonds fell from 12.42% the day before the March announcement to 11.57% after it.
On Tuesday it fell 33 basis points to 11%. Yields move inversely to the price.
The rand firmed on Tuesday to its best level in a week, boosted by gains in markets globally on optimism that the coronavirus outbreak might be peaking in some hard-hit countries. It gained 2.47% to R18.19/$ at 6.15pm.
The Bank’s steps remain moderate compared to the dramatic approach being rolled out by other central banks, and despite comparisons to quantitative easing (QE), the Bank has been at pains to maintain that its assets purchases programme is not QE.
Central banks such as the US Federal Reserve and European Central Bank have in recent weeks ramped up measures to inject money into their economies and financial systems.
QE is normally applied in countries where interest rates are zero or close to zero, and inflation is far below target or even threatening to turn negative, the Bank has said.
In general, in these countries QE is used to raise the level of inflation and for economic stimulus purposes.