The Reserve Bank (RBNZ) is using more of its tools to help banks keep lending to their corporate clients.
It will start buying corporate and asset-based securities via a weekly Open Market Operation.
The aim is to “provide additional liquidity to the corporate sector, and support smooth market functioning”.
Assistant Governor Christian Hawkesby said: “Our objective is to encourage banks to continue to fund their corporate clients by purchasing their debt securities, given the confidence that these securities can be funded by exchanging them with us for cash.
“In this way, by banking the banks, we are ensuring large businesses can better manage their cash flows, and lower funding costs.”
The RBNZ will also offer to buy New Zealand government bonds.
These two measures come on top of the RBNZ last Monday announcing it will buy up to $30 billion of New Zealand government bonds over a year on the secondary market.
The Monday before - March 16 - the RBNZ announced it would cut the Official Cash Rate (OCR) by 75 basis points to 0.25%, where it would remain for at least a year.
Here are more details from the RBNZ:
Open Market Operation for Corporate and Asset-Backed securities
The Reserve Bank today announced it will hold an Open Market Operation (OMO) each Tuesday where just Corporate and Asset-Backed eligible securities will be acceptable as collateral on a two name basis.
Details of the Corporate OMO are:
- The OMO will operate in a similar manner to the Reserve Bank's regular OMOs and will be used to inject cash into the banking system using eligible Corporate and Asset-Backed securities, which are listed on the Reserve Bank's website at Eligible Securities and Haircuts for Domestic Markets Operations.
- The OMO will be held at 11:00am each Tuesday morning and will typically offer up to $500 million dollars for terms out to approximately 3 months. The Reserve Bank reserves the right to alter both the volume and maturity dates at its discretion.
- The operation of this facility and the rules and guidelines applying to it will be the same as for the regular OMOs. These details can be found on the Reserve Bank's website at the Operating Rules and Guidelines for the Domestic Markets section.
- Bids will be accepted between 11:00am and 11:15am and it is expected that results will be announced at approximately 11:30am.
- Settlement will occur on a same-day basis.
The first operation will be held on 31 March 2020.
The Corporate OMO is seen as temporary, to support market functioning. The Reserve Bank will review this operation in 12 months’ time or sooner if demand diminishes.
Offer to purchase NZ Government May 2021 nominal bonds
The Reserve Bank is offering to purchase NZ government bonds maturing 15 May 2021 for liquidity management purposes and to support market functioning.
This type of programme is usual ahead of a government bond maturity, and is typically managed by either New Zealand Debt Management or the Reserve Bank.
Purchases will be held to maturity on the Reserve Bank's balance sheet.
The offer opens at 10:00am on 31 March 2020 and will remain open until further notice.
Preferred settlement dates will be determined by projected liquidity flows. Transactions will be priced using the formulas included on the Domestic Markets section of the Reserve Bank’s website.
This programme is distinct from the Reserve Bank’s Large Scale Asset Purchases (LSAP) of New Zealand government bonds.
28 Comments
These asset-purchasing programs carried out by central banks are no different than crazy shoppers panic-buying essentials at their local supermarkets. Both groups believe they need to buy as much as possible to survive in this wave of uncertainty but when all this is over, their purchased items may not be worth much to anybody.
Mimicking of those never ending IT acronyms, abbreviations; OCR, OMO, LSAP market responds on it's own; FOMO, FONGO.. C'mon guys as Mr. Orr has stated (correct me if I'm wrong)..solid cash supply for 21-22 - Can anyone from interest.co.nz dare to evaluate the likeliness of OBR by around 2023?
It's amazing what a f'd up world we live in now where all the central banks have to purchase Government Bonds and any other soon to be downgraded corporate and MBS bonds. If they instead let the "markets" set the appropriate interest rates they would have no problem selling them. Hell I'd willingly buy NZ Government Bonds at any rate about 3% like I use to with my old Post Office Savings Account. Buy why would I only accept 0.75% for lending my cash to the Government for 4 years - 0.75% is the currently offered rate!
https://debtmanagement.treasury.govt.nz/individual-investors/kiwi-bonds…
Assistant Governor Christian Hawkesby said: “Our objective is to encourage banks to continue to fund their corporate clients by purchasing their debt securities, given the confidence that these securities can be funded by exchanging them with us for cash.
Can anyone define the public utility of central bank reserves (supposedly cash) in the process of lending credit to banks' corporate customers?
Corporate bonds are underwritten in the first instance by investors swapping their savings for them, thereafter banks can commit to lend to corporate customers in the usual way by accepting their IOUs and crediting their deposit accounts with bank IOUs collateralised with corporate assets such as these savings (someone else's IOU).
If banks enter the market place to purchase corporate bonds and swap them with the central bank for reserves they have let the risk taking public out from a poor investment choice at a better price than they would have expected to receive and the banks can claim central bank IOUs as collateral.
The rentier class is supported yet again but banks have not undertaken any further credit creation on behalf of the majority who have no means to own securities in any instance, unless more corporate bonds are issued to the entitled investor class. And the merry go round continues for the few.
"It will start buying corporate and asset-based securities via a weekly Open Market Operation."
Repos are an instrument that is akin more to a collateralised loan, and not a traditional sale and purchase agreement for an end buyer (such as in property).
From the RBNZ press release
Open Market Operation for Corporate and Asset-Backed securities
The Reserve Bank today announced it will hold an Open Market Operation (OMO) each Tuesday where just Corporate and Asset-Backed eligible securities will be acceptable as collateral on a two name basis.
1)https://www.rbnz.govt.nz/markets-and-payments/domestic-markets/domestic…
2) eligible securities in repo market - https://www.rbnz.govt.nz/markets-and-payments/domestic-markets/repo-eli…
The RBNZ is providing funding in the repo market to the banks. i.e via a repurchase agreement, the RBNZ is lending money for a fixed period and the RBNZ is taking collateral to support that loan - LVRs are anywhere from 80 to 99% depending upon the collateral (e.g a 20% hair is equivalent to an LVR of 80%).
Refer:
https://www.rbnz.govt.nz/markets-and-payments/domestic-markets/repo-eli…
The fact that the RBNZ is involved suggests that there are liquidity challenges for banks in the repo markets and the RBNZ is providing liquidity to the banks - an indication that there is some market stress between the demand for funds and the supply of funds. Traditional providers of financing in repo markets are money market funds and banks.
https://www.rbnz.govt.nz/news/2020/03/rbnz-to-implement-30bn-large-scal…
"It will start buying corporate and asset-based securities via a weekly Open Market Operation."
This is a little misleading. This is a repo operation, the RBNZ are offering to inject cash into the system by financing bonds, less haircut. The RBNZ is not buying the bonds and is not the beneficial owner, that stays with the repo counterparty.
It is all out of the Ben Bernanke playbook. Helicopter money raining down from the sky. Forget cash is king in this world. Take an area of Auckland with a 1000 houses. In one year there might be 1050 if you are lucky. In that same area if there is 1000 dollars there could be 2000, 10,000 or 100,000 or 1 billion. All printed out of thin air. Negative interest rates - get paid to have a mortgage!
Whatever creates employment and gives people work and purpose. The emotional need extends to the flash car factory worker as well. Should be encouraged. Can't argue against people living in houses instead of cars.
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ASB commented today that the QE program seemed to be focusing on the mid range maturities hence explains the larger differential with the long end of the curve (steeper curve vs a month ago). RBNZ need to keep the purchasing consistent ~ cheaper and accessible long term funding is the best solution for all firms.
Still more to come from Government, Banks and Reserve Banks as it goes from bad to worse.
No one knows how long will it last and what will happen in future and How bad the situation can get from here.
Government will go broke and may have to print money till..........risking all economy fundamentals.
Question to be asked is this the worst situation that we are facing or is it just the start or.....
If the government can print money, it will not go broke. It can lead to hyperinflation which wipes out savers.
1922-1923 Hyperinflation in Germany
https://mashable.com/2016/07/27/german-hyperinflation/
The bank notes are handy if you need to light a fire.
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