MNI: More BOC Secondary Debt Buys Mirror Best Practices- Memos

MNI (OTTAWA) - Expanding Bank of Canada secondary market debt operations begun during QE to more regular balance-sheet management would align policy with global peers, and perhaps help show monetary policy independence, according to staff briefings MNI obtained through a freedom of information request.

The BOC gained significant experience in secondary market trading through the pandemic when it deployed full QE and now QT for the first time, according to the documents. Continuing with secondary market debt purchases as the balance sheet normalizes would be in line with past practices at the Fed, RBA, SNB and Riksbank.

The 51 pages of documents flesh out a March speech by Deputy Toni Gravelle laying out plans for the Bank’s balance sheet as QT winds down. Gravelle raised the idea of not fully returning to the pre-pandemic habit of taking a fixed share from "primary" government auctions of bills and bonds to supply its balance sheet, saying each approach has pros and cons.

The documents MNI obtained include four reports prepared in February for Governor Tiff Macklem and his deputies. One paper said the Bank could consider returning to the status quo of buying at auction, a hybrid approach, or only secondary purchases.

BEST PRACTICES

Buying on the secondary market would be a break from the Bank’s past but “is the purchase method most aligned with international best practices and satisfies the condition that purchases are undertaken at the Bank’s own initiative and based on its balance sheet needs” one of the documents read.

That comment was part of a section asking if a new policy goal could be well communicated. While parts were blanked out, it began by referencing an IMF paper saying asset purchase programs should stress that decisions are taken independently. (See: MNI POLICY: BOC Secondary Debt Buys Curb Political Blowback)

In normal times the balance sheet expands to match assets with liabilities such as the growing supply of bank notes, and the pandemic QE policy contributed to much faster growth. The Bank's current QT stance allows maturing assets to roll off the books.

Most of the memo references to precisely when QT could be wound down and the future composition of the balance sheet were redacted. Gravelle's speech said the Bank intends to keep CAD20 billion to CAD60 billion of settlement balances around after QT winds down next year to support the shift to a “floor system” of managing overnight markets.

GOVERNMENT CASH BALANCES

One staff memo said that “Of that amount, $20-30bln is estimated to be needed for efficient payment system functioning and up to $25bln to mitigate the impact changes in other Bank liabilities, namely government cash balances, have on settlement balances.” Changes in settlement balances tied to moves in government cash and some other items were less than CAD25 billion in more than 95% of the weeks from April 2020 to May 2023, staff found.

Staff also reviewed the risk that a given purchase method would fail to meet "the desired target asset allocation" and how to mitigate such a result.

"If secondary market purchases are retained as the purchase method for GoC bonds, they would occur on a regular basis. As such, if a purchase operation was not successful in acquiring the targeted amounts, there would be opportunities to make up any gaps during subsequent purchase operations," according to emailed comments from Bank spokeswoman Amelie Ferron-Craig.

Another consideration for bond repurchases is fiscal policy, because accounting rules deem those securities as being retired even though they are held on the Bank’s balance sheet, one memo found. That means the government would record a gain or loss based on whether the Bank purchased bonds at a premium or discount. (See: MNI INTERVIEW: Trudeau Deficit Cap Strained By Election Threat)

Excerpt of documents: