The Bank of Canada is moving to help keep down long-term bond yields as Ottawa cranks up issuance to pay for COVID-19-related spending, analysts say, with the central bank raising the amount of 30-year bonds it buys in its quantitative easing program.
Long-term bond yields are currently trading at historically low levels at about 1.10 per cent. But that could change as economic recovery gathers momentum, and after Ottawa on Wednesday forecast its largest budget shortfall since the Second World War, saying it would “significantly” raise long-term debt issuance.
The BoC on Monday purchased $600-million of 30-year bonds in a reverse auction. The maximum amount had previously been $400-million, according to strategists.
Increased purchases could go some way in keeping yields down, said Ian Pollick, global head of FICC strategy at CIBC Capital Markets.
The BoC “recognizes the risk of incoming supply, and is responding in-kind,” Mr. Pollick said.
The 30-year yield jumped by more than 10 basis points - its largest increase since mid-March - last week when the government released its new deficit forecast.
The BoC appears “to be changing the composition” of its balance sheet to more closely match Ottawa’s preference for longer-term borrowing, said Andrew Kelvin, chief Canada strategist at TD Securities.
Investors will on Wednesday eye the BoC’s interest rate announcement, as well as the central bank’s Monetary Policy Report, the first since Tiff Macklem took the reins as governor, for changes to the bond-buying program.
“The BoC could very well buy more bonds in response to higher issuance and could at a minimum jawbone this option in Governor Macklem’s press conference,” Derek Holt, vice-president of capital markets economics at Scotiabank, wrote in a note.
“Signalling a willingness to buy more before potential further sell-offs allows governments to focus their efforts more upon the umpteen other pressures upon their finances,” Mr. Holt said.
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