Central banks at full throttle buying bonds to control markets


Central banks have started the new week right where they left off Friday — in the thick of the action pledging to boost liquidity in bond markets as risks to the global financial system loom larger.

The Reserve Bank of Australia and the Bank of Japan offered to buy the equivalent of almost $10 billion in debt on Monday, while New Zealand embraced quantitative easing. At 2.5 trillion yen ($22.7 billion), unscheduled bond purchases by the BOJ this month are already the highest since it introduced the yield-curve control in 2016.

Markets are in tumult, with 10 year U.S. Treasury yields swinging in a range of more than 50 basis points in each of the past three weeks, something that hasn’t been seen in decades, and Australia seeing a flash crash in its debt market. Investors are dumping the safest of assets in favor of cash, which has forced the Federal Reserve and many of its peers into coordinated action to bolster dollar swap lines.

“Central banks just have to keep providing liquidity since nobody knows the extent of dollar funding shortage,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities Co. in Tokyo. “So far, their efforts haven’t calmed market sentiment but they should eventually.”

Australia’s central bank said Monday it would spend as much as A$4 billion ($2.3 billion) on government debt, sending 10-year yields down as much as 25 basis points. The RBA and BOJ also continue to pour in funds through repurchase operations.

The RBA pumped in more than A$40 billion so far this month through repurchase agreements, pushing liquidity in the system to records. As a result, the spread between repo rates and overnight index swaps has compressed to the tightest levels of the year.

The Bank of Thailand said Sunday it is stepping in to arrest slumps in fixed-income mutual funds and corporate bonds.

‘More Effective’

The yield on New Zealand’s 10-year bonds plunged as much as 54 basis points. The Reserve Bank said it would purchase up to NZ$30 billion ($17 billion) of sovereign bonds over the next 12 months. The program will begin this week with NZ$500 million of purchases.

Japan’s benchmark 10-year yield was down 2.5 basis points at 0.05% after the BOJ offered to take in 800 billion yen of three-to-10 year securities in an unscheduled operation on Monday. That was in addition to scheduled buying worth about 150 billion yen in longer maturities.

“Central banks around the world see the provision of funds as more effective right now than cutting rates,” said Shuichi Ohsaki, chief rates strategist at Bank of America Merrill Lynch in Tokyo. “The BOJ on its part is conducting funding operations to ensure yields will not rise.”