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MNI POLICY: Govt Bonds Take First Big BOC Balance Sheet Lead

Corporate repos were main asset in early part of Covid crisis

Credit: Bank of Canada
MNI (Ottawa)
OTTAWA (MNI)

Federal government bonds are now the dominant asset on the Bank of Canada's balance sheet, as emergency funding to stabilize markets slows while Prime Minister Justin Trudeau presses ahead with a record deficit to pull the economy through the Covid-19 pandemic.

The central bank held CAD196 billion of Canadian government bonds as of July 29, up CAD7.4 billion from a week earlier, figures published Friday from Ottawa showed.

Corporate repos fell about CAD1 billion to CAD186 billion. At the end of May, the BOC's holdings of repos were CAD71 billion greater than for federal bonds.

Governor Tiff Macklem has pledged aggressive QE to underpin what he says will be a tepid recovery, growing the balance sheet to an unprecedented CAD547 billion this week. The BOC pledged earlier this year to buy at least CAD5 billion a week of federal bonds until the recovery is well underway, and earlier this month Macklem said QE will help support his new pledge to keep rates at 0.25% until inflation stabilizes at 2%.

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 Canada's CAD343 billion deficit, a postwar record 16% of GDP.

The finance department reported earlier Friday that the federal deficit was CAD86.8 billion over April and May, the first two months of the fiscal year. Those dollar figures alone shatter the previous record for any annual deficit Canada has ever faced.The "financial requirement" that's a better measure of immediate borrowing needs was even steeper at CAD137 billion over April and May.

T-bill purchases were the lowest since QE began at CAD331 million, down from CAD6 billion three weeks ago, in line with the government's shift to longer-term borrowing.

Programs to buy up to CAD50 billion of provincial government bonds and CAD10 billion of corporates remain modest, with purchases to date of CAD6.6 billion and CAD141 million, respectively.

MNI Ottawa Bureau | +1 613-314-9647 | greg.quinn@marketnews.com