MNI POLICY: Record Federal Bond Buys Swell BOC Balance Sheet

By Greg Quinn

     OTTAWA (MNI) - The Bank of Canada bought a record CAD8.4 billion of federal

bonds this week as Governor Tiff Macklem pledged aggressive QE to underpin a

tepid economic recovery, growing the balance sheet to an unprecedented CAD540

billion.

     Federal bond holdings grew to CAD182 billion as of July 15, figures from

the Ottawa-based bank posted on Friday showed. The BOC pledged earlier this year

to buy at least CAD5 billion a week of federal bonds until the recovery is well

underway, and on Wednesday Macklem said QE will help support his new pledge to

keep rates at 0.25% until inflation stabilizes at 2%.

     "We will be looking for signs that the recovery is becoming more

self-sustaining," before potentially slowing QE, Macklem said in response to a

question from MNI at a press conference. "Logically yes, the recovery being well

under way comes before capacity has been fully absorbed, but those of those are

some ways off."

     The BOC has said the value of QE is shifting from stabilizing markets that

froze up earlier this year to supporting a recovery threatened by steep job

losses and weak confidence. 

     Bond purchases also help the market digest Finance Minister Bill Morneau's

CAD343 billion deficit, a postwar record 16% of GDP. The BOC's balance sheet is

now equal to 23% of first-quarter GDP.

     --T-BILL SLOWDOWN

     T-bill purchases were also the lowest since QE began at CAD2.3 billion,

down from CAD6 billion a week ago, in line with the government's shift to

longer-term borrowing. 

     Holdings of repos were little changed at CAD195 billion, matching the

lowest since May 13 and down from a peak of CAD211 billion about a month ago.

Repo holdings had swelled from CAD15 billion in mid-March before the Covid-19

pandemic froze markets.

     Programs to buy up to CAD50 billion of provincial government bonds and

CAD10 billion of corporates remain modest, with purchases to date of CAD5.6

billion and CAD141 million, respectively.

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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