Government Bond Purchases

In its long-dated outright transactions, the Reserve Bank purchases government securities with terms to maturity generally greater than 18 months. Prior to March 2020, the Reserve Bank typically undertook these transactions on a quarterly basis, and in relatively small quantities, to replenish the holdings of securities used for liquidity management purposes.

Following a series of decisions taken by the Reserve Bank Board since March 2020, the Reserve Bank for a time purchased government securities for monetary policy purposes. Australian Government Securities (AGS) were purchased to support a target for the yield on an Australian Government bond further out the yield curve than the cash rate – the yield target was discontinued on 2 November 2021. The Bank also purchased AGS and semi-government securities (semis) as part of a bond purchase program to lower longer-term yields and, if required, to address market dislocations. On 1 February 2022 it was announced that purchases under the bond purchase program would cease after 10 February 2022.^[1]

The Board's decisions on the bond purchase program were announced in the Monetary Policy Decision Media Release.

The allocation of bond purchases under the Bond Purchase Program was 80 per cent AGS and 20 per cent semis. Allocation between semis was guided by the stock of debt outstanding and relative market pricing. Purchases were conducted on Monday, Wednesday and Thursday of each week, excluding public holidays. Purchases of AGS ranging from the April 2024 bond through to AGS with residual maturity of around 7 years were held on Mondays, and purchases of AGS with residual maturity of around 7 to 10 years were held on Thursdays. Semis purchases were held on Wednesdays and cover bonds maturing from April 2024 through to bonds with a residual maturity of around 10 years. These purchases were conducted via multi-price auctions. The Bank closely monitored the impact of purchases on market functioning and was prepared to adjust the auctions if necessary, including their size, composition and timing.

The bond purchase program involved purchasing fixed-rate, nominal bonds issued by the Australian Government and states and territories. Inflation-indexed bonds were not purchased under the program. The Reserve Bank excluded from purchases any bond lines that the Bank was aware had recently been tapped by the issuing authority or are newly issued bonds.

As noted, if required the Reserve Bank was prepared to purchase government securities to address market dislocations.

Announcements

Long-dated outright transactions were conducted through multi-price auctions over Yieldbroker DEBTS. Auctions for the Reserve Bank to purchase government bonds in the secondary markets were scheduled on Mondays, Wednesdays and Thursdays. The Reserve Bank announced its intentions for government security purchases at 11.15 am (AEST/AEDT) via Yieldbroker DEBTS and on Reuters – RBA27; Bloomberg – RBAO8 on the day of purchase.

The announcement indicated the total face value (AUD) and specific securities the RBA was willing to purchase, the time within which offers were to be submitted (typically from 3.25 pm to 3.30 pm AEST/AEDT for AGS and at different times between 2.30 pm and 3.35 pm AEST/AEDT for Semis), and the settlement date (two days after the transaction, t+2). The RBA had discretion to vary this schedule if necessary.

Eligible Counterparties

All RITS members deemed eligible to participate in the Reserve Bank's domestic market operations could participate in the Reserve Bank's long-dated outright auctions.

Approaches

Approaches were made over Yieldbroker DEBTS. Offers were to be made in absolute yields in quarter basis point increments, with a minimum offer of $1 million face value and increments of $1 million. Participants that encountered difficulties in submitting their approaches over that system could directly contact Yieldbroker DEBTS and also inform the Reserve Bank's Domestic Markets Desk by email.

Offers could not be submitted, changed or withdrawn after the cut-off time for submissions has passed.

Erroneous offers

Given the time-critical and public nature of its auctions, the Reserve Bank was unable to contact participants during the auction or consider revised offers after the cut-off time for submissions, even in the case where an approach may have been submitted by a participant erroneously. Yieldbroker DEBTS alerted participants if their approach was priced at yields with a spread to mid-market rates of more than 2 basis points for AGS and 5 basis points for semis above prevailing mid-market yields. These are alerts only and participants could submit offers with yields above these thresholds. The Reserve Bank reserved the right to amend these alert levels, subject to market conditions. Participants could also put in place arrangements on Yieldbroker DEBTS to manage thresholds as they see fit. While under no obligation (and without limiting the Reserve Bank's right to accept or reject offers at its absolute discretion), the Reserve Bank ordinarily rejected offers during an auction that the Reserve Bank considered to be, or likely to be, erroneous. An offer was typically considered to be, or likely to be, erroneous if it had a spread of more than 20 basis points above mid-market rates.

Allocation

Allocation within an individual bond line was made on the basis of yield. Allocation between bond lines was made on a relative value basis, subject to the Reserve Bank's discretion, and for the states and territories was also guided by the stock of debt outstanding.

Approaches could be partially filled. Multiple successful approaches for a given security at the same yield were filled on a pro-rata basis.

Approaches that were partially filled were rounded up to the nearest million dollars.

Notification

All participants were notified promptly of the success or otherwise of their approach via Yieldbroker DEBTS.

Aggregated results were published on market data services shortly after the operation, and on the RBA website. Historical results are published in Statistical Table A3 on the Reserve Bank website. These include the issuer and series, face value and weighted average and cut-off yields for each security purchased. Data on the Reserve Bank's outright holdings of Government Securities are published in Statistical Table A3.1 on the Reserve Bank website. No information regarding the identities of the Reserve Bank's counterparties is made public.

Securities Lending and Switch Transactions

To aid market functioning, the Reserve Bank stands ready to lend securities that it owns against cash or eligible collateral on a reverse enquiry basis; pricing is entirely at the discretion of the Reserve Bank and is subject to change. See also the market data services (Reuters – RBA37, RBA38, RBA39 and RBA40; Bloomberg – RBAO6 and RBAO9). The Reserve Bank also operates a Securities Lending Facility on behalf of the Australian Office of Financial Management (AOFM). The Reserve Bank will also consider proposals to sell government bonds that it owns outright against an offsetting (duration-neutral) purchase of government bonds, although accepting such a proposal will be entirely at the discretion of the Reserve Bank, and the Reserve Bank will typically charge a spread relative to mid market rates. The Reserve Bank publishes details of its outright holdings of government bonds in Statistical Table A3.1 and details of its securities lending and switch transactions in Statistical Table A3.2.

Endnotes

Details of Reserve Bank purchases of Government Securities were also announced on 19 March 2020, 3 November 2020, 2 March 2021, 6 July 2021, 7 September 2021 and 2 November 2021 (media release and speech). [1]