Reserve Bank’s bond purchasing ‘needs to stay open’ amid uncertainty
The stabilisation of the bond market over the last two months has led to the Reserve Bank tapering off its bond purchases in the secondary market, but the possibility of future risks means the programme has to remain open, analysts said on Monday.
The medium-term budget policy statement, which will be tabled by finance minister Tito Mboweni in October, is one such possible risk, while global events could also have a negative effect on the bond market, RMB investment strategist Elena Ilkova said.
The medium-term budget policy statement will provide an indication of the government’s adherence to the commitments made in the supplementary budget, and to the IMF to get the recent R70bn loan.
The Bank raised its holdings of government bonds at a slower pace in July, taking up just less than R2.5bn through the bondbuying programme it had launched to smooth the functioning of the local market.
The slower take-up began in June, when the Bank reduced its purchases of government securities to about half of those bought in previous months.
The Bank has said this was due to an improvement in market conditions.
July’s purchases took the Bank’s total holdings of government bonds to about R38.4bn since it announced the programme on March 25, data from the central bank showed on Friday.
The Bank has not revealed a target for the purchases but deputy governor Fundi Tshazibana told Business Day recently the Bank has always maintained that the programme is a “two-way tool”, and as market conditions normalise it would start to sell these bonds to withdraw liquidity from the market.
The Bank was forced to intervene in the market after government bonds came under pressure as investors fled to safe haven assets amid coronavirusrelated panic, causing bond yields to breach the 13% mark in late March.
“It is not surprising that the Bank’s buying of bonds has come down, as the intention [the Bank] has had is that they will only intervene when they feel there is a breakdown in the operations of the market,” Ilkova said.
“The intention never was to buy wholesale bonds in the form of quantitative easing, but rather about managing the functioning of the market.
“The market has been operating reasonably well so it hasn’t been necessary to intervene in a big way.”
However, she cautioned that if there were a major risk event and liquidity disappears from the market it may become necessary for the Bank to return in a major way.
Ilkova said she believes the buying programme will remain open for a while longer, adding that “there is no need to end it now” given the risk associated with the medium-term budget policy statement, specifically if the market does not like what it hears.
Anchor Capital co-chief investment officer Nolan Wapenaar said the Bank’s buying programme has in effect come to an end, as the risks have dissipated and the market is more functional. However, he said it is good to keep the policy option open in case of possible future risks. “We are in uncertain times and things could escalate again, though at the moment it is pretty much unneeded,” he said.
Citigroup economist Gina Schoeman said the tapering off of the Bank’s buying suggests that it is now not as concerned as it was about the levels of market instability.
Absa fixed-income and currency strategist Mike Keenan said in a note the Bank’s tapering of purchases since April and May is understandable given that market volatility has subsequently settled down.
This is apparent in narrower bid-ask spreads on SA government bonds and less volatile daily price moves.
Along with the bond purchases, the Bank has taken other measures to support an economy hit by the effects of lockdown restrictions, including slashing interest rates to record lows of 3.5% and easing regulations to encourage banks to keep lending throughout the crisis.
The recession as a result of the Covid-19 pandemic is expected to be the worst since the Great Depression, and has left the state’s already weak finances in dire straits.
The Bank has come under intense pressure to launch a formal quantitative easingstyle programme as a means to fund the budget deficit, something the Bank has steadfastly resisted.