MNI: BOC May Rejoin Bill Sales With Holdings Lowest Since 1987

The Bank of Canada's Treasury bill holdings have fallen to the lowest since 1987 after months of skipping the bidding at auctions, and economists told MNI the BOC may resume some buying before it runs out of short-term government debt entirely.

The central bank is on track to have no T-bills on its balance sheet by year-end based on the schedule of maturing assets, Dominique Lapointe, former finance department researcher and now senior economist at Laurentian Bank Securities, told MNI. But policy makers are unlikely to break with a long history of having short-term government debt on its books, he said.

"It never was zero, so I'm assuming that at some point they will go back and buy some," Lapointe said by phone from Montreal. "They do have the option to use their own securities to create liquidity overnight, so maybe they want to leave that option open by owning some."

The BOC's reduced purchases from bill auctions may have helped liquidity after repo trading earlier this year appeared stretched by a lack of collateral to backstop some trades, he said.

SIDELINED SINCE APRIL

Bill holdings were CAD7.40 billion as of Aug. 11, the lowest since April 1987 when the stockpile was CAD6.78 billion. The BOC's records back to 1980 always show some T-bills on its books.

The BOC's bill holdings surged from about CAD25 billion when the pandemic struck to a record CAD140 billion last July as the government raised quick cash for record health and welfare spending. Since then the supply has faded as Finance Minister Chrystia Freeland sought more long-term bond sales to lock in record low borrowing costs. (See: Canada Finance Dept Cautioned on Big Long-Term Bond Sales)

A BOC spokeswoman declined to comment directly on the fall in bill holdings but pointed to market notices last year about scaling back as markets healed from the rupture caused by the Covid-19 pandemic. Last September the BOC trimmed purchases at auctions from 20% to 10% of the offerings, and reduced again in November to a range of zero to 10%. The November decision said: "while the intent will be to minimize the Bank's participation over time, purchase amounts will vary depending on different factors, including prevailing market conditions and balance sheet requirements."

Before that, in April 2020 the BOC raised participation to as much as 40% from a traditional cap of 25%, then lowered it three months later to 20% and said that was in line with the pre-pandemic average. The BOC last bought T-bills at the April 13 auction, and none since then.

Former BOC staff like TD Securities Chief Canada Strategist Andrew Kelvin and C.D. Howe Institute associate research director Jeremy Kronick told MNI they can think of no legal barrier to the BOC's T-bill holdings slipping to zero. At the same time, the Bank is in charge of running federal government's bill auctions, so Kronick said such a move would be unusual.

"My guess is they would always want to maintain some T-bills in order to fine-tune where necessary," Kronick said, and "to make sure they have a stake in the auction they are running."

Bank of Canada Treasury Bill Holdings:

Source: BOC

The balance sheet remains swollen even with reduced t-bills thanks to the BOC's first foray into quantitative easing last year. Federal government bond holdings have increased to CAD410 billion from CAD77 billion as QE started out with a target of CAD5 billion a week. The bond purchase goal has since been scaled back in three steps to CAD2 billion, including an extension of the maturity of QE assets to underpin the economic recovery.

Sources have told MNI the balance sheet will remain elevated even if the BOC pares back net purchases of bonds to zero later this year, to enforce its record low 0.25% policy interest rate.

The balance sheet has shrunk some as QE is reduced, to CAD410 billion from a peak of CAD575 billion in March. That's still far above the CAD120 billion recorded before the pandemic. Part of the decline is also linked to reduced holdings of term repos, at CAD31 billion last week versus a peak around CAD210 billion last June.

The Bank "is trying to slow the growth in the absolute size of the balance sheet without reducing support for the bond market; in effect, the stimulus provided from the balance sheet is being reallocated from bills to bonds, where it can have a greater impact," Kelvin told MNI.