Bank of Canada Follows Fed With Market Liquidity Injections
Bank of Canada Follows Fed With Market Liquidity Measures
(Bloomberg) -- The Bank of Canada is acting to inject liquidity into the country’s funding markets in a bid to bolster financial stability, following similar efforts by the Federal Reserve.
The bank will “proactively” support interbank funding by increasing the frequency with which it purchases Canadian government bonds to weekly, from every two weeks, and widening the terms to include six-month and 12-month operations, it said Thursday in a statement.
“The Bank of Canada continues to closely monitor global market developments and remains committed to providing liquidity as required to support the functioning of the Canadian financial system,” it said in statement.
The bank, which hasn’t done one-year repo in a decade, will start with C$7 billion ($5 billion) of purchases on March 17.
The move comes the same day the Federal Reserve took aggressive steps to ease what it called “temporary disruptions” in Treasuries, promising a cumulative $5 trillion in liquidity and widening its purchases of U.S. government bonds.
For the Canadians, the plan to boost liquidity follows the biggest plunge in Canadian stock prices in eight decades on mounting concern about the scale of the economic hit from the coronavirus pandemic.
Policy makers already slashed the bank’s benchmark interest rate by half a percentage point this month amid concern about the widening fallout. Since then, oil prices have plunged, adding another shock to an already faltering economy and raising the likelihood of more rate cuts.
Swaps trading suggests investors are expecting another 75 basis points in cuts by mid April.
“In addition to using just the blunt tool of lowering interest rates, they’re trying to help with liquidity in the market,” said Ian Pollick, head of rates strategy at Canadian Imperial Bank of Commerce in Toronto. “They’re just liquefying the system. It’s consistent with moves we saw earlier today with the Fed.”
On top of the repo operations, the bank will expand the scope of a bond buyback program in which it sells newer bonds for older issues in a bid to “add market liquidity and support price discovery.”
These buybacks will now take place at least weekly and go beyond the typical 30-year maturity, with the first “switch” of C$500 million taking place on March 16.
Currently, the Bank of Canada only purchases securities every other week through one-month and three-month repos, in the range of C$3 billion to C$6 billion -- a practice that will continue. The sale of six-month and 12-month repos will take place in alternating weeks.
”We don’t expect today’s announcement to have a material impact on the overall level of rates; the cash management buybacks may take some bonds out of the market on net, which would be supportive for fixed income, but that impact will likely be marginal,” Andrew Kelvin, senior Canada rates strategist at Toronto-Dominion Bank, wrote in a note to clients. “Today’s announcement should help promote liquidity however, by offering dealers more funding and an outlet to sell less liquid GoCs.”
--With assistance from Divya Balji, Michael Bellusci and Erik Hertzberg.
To contact the reporter on this story: Shelly Hagan in ottawa at shagan9@bloomberg.net
To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Chris Fournier, Carlos Caminada
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