RDP 2022-02: The Yield and Market Function Effects of the Reserve Bank of Australia's Bond Purchases 8. Conclusion

In this paper we assess the effect of three Reserve Bank policy measures involving government bond purchases: purchases in support of government bond market function conducted between March and May 2020; purchases in support of the yield target conducted from August 2020 until October 2021, and purchases aimed at lowering longer-term yields conducted under the bond purchase program from November 2020 until February 2022.

We find that the announcement of purchases in support of market function saw a reduction in the yields on shorter-dated AGS of 10 to 20 basis points, but that there was no decline in longer-dated AGS yields or in the spreads of semis yields to AGS. The actual purchases had an additional yield effect, with each percentage point of the free float of AGS purchased estimated to have reduced yields by up to around 1½ basis points, and each percentage point of the free float of semis purchased estimated to have reduced semis spreads by up to around ½ basis point. These purchases were not designed to lower yields, however. Rather, they were designed to support market function, and the evidence suggests that they achieved this: bid-offer spreads fell as purchases proceeded, and various measures of futures market function improved.

For the yield target, we find a significant announcement effect on the 3-year AGS yield, in the order of 15 to 25 basis points. However, the policy announcement was not enough by itself to keep the 3-year yield consistently at the target, especially given how uncertain and rapidly changing the economic outlook was over the period. Occasional bond purchases were required to reinforce the target. Purchases did have an effect on yields, of around 1 basis point per $1 billion purchased, or 0.2 basis points per percentage point of free float purchased, although this effect appeared to dissipate over time. Yield target purchases led to wider bid-offer spreads and are likely to have contributed to some reduction in the functioning in the 3-year futures contract for a time.

Our best estimate is that the bond purchase program reduced longer-term AGS yields by around 30 basis points leading up to and on the announcement of the program, while the additional implementation effect from purchases appears to have been be small and temporary. Purchases under the program were associated with a small widening in bid-offer spreads.