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The Bank of Canada has decided to cut its purchases of short-term government debt in half, saying that strains in both the federal and provincial markets “have diminished significantly” from when the bank ramped up its buying in the early days of the COVID-19 crisis.

In a market notice issued Tuesday, the central bank said it will reduce its purchases of Government of Canada treasury bills to 20 per cent of the amount issued at each auction, from 40 per cent. That matches the share of federal T-bill auctions that the bank typically purchased prior to the pandemic.

In a separate notice, the bank also said it would trim its purchases of all provincial issues of money market securities with maturities of 12 months or less to a maximum of 20 per cent, from a maximum of 40 per cent.

Both changes take effect Monday.

The Bank of Canada announced the provincial program on March 24, as a serious liquidity crunch across all financial markets had spilled over into the provincial short-term debt space – elevating costs and straining the provinces’ ability to raise funds for near-term needs at a particularly critical time. The bank followed on April 15 with an announcement that it would temporarily increase its purchases of federal T-bill issues, lending support to misfiring funding markets for federal short-term funding needs.

Both moves were part of the central bank’s massive and multipronged effort to stabilize badly wobbling financial markets and keep the credit taps open for governments, businesses and consumers during the worst of the COVID-19 crisis, which had triggered a severe cash crunch as panicked investors ran for cover. The effort has swelled the bank’s balance sheet to $540-billion, from about $120-billion prior to the crisis, as it has bought long- and short-term government debt, supported corporate borrowing and kept lenders well-lubricated with funds.

But as pandemic fears have eased and economies have begun to reopen in Canada and elsewhere, the pressures on financial markets have come off the boil, and many of the Bank of Canada’s emergency measures have become less needed. The bank’s weekly balance sheet statistics show that purchases under several of its emergency market programs, including bankers’ acceptances, commercial paper and repos, have slowed dramatically in recent weeks.

Still, the bank went to some pains in last week’s regularly scheduled interest-rate decision to assure the markets that it is a long way from withdrawing its biggest supports. It reiterated that it would maintain its minimum $5-billion-a-week purchases of Government of Canada bonds “until the recovery is well under way.” It also said that its programs to buy smaller amounts of provincial and corporate bonds “will continue as announced.”

The bank said Tuesday that it may “adjust” the size of the federal and provincial money market programs again “if market conditions warrant.” But while money markets have improved significantly over the past few months, it’s unlikely that the Bank of Canada will wind down the programs altogether, said Scott Lampard, head of global markets at HSBC Bank Canada.

“The general mantra you’re hearing from global central banks is: ‘Do what’s required to get economies through this.’ I think if there’s tinkering or tweaking of some of these programs it’s probably going to be more on the margin until we’re definitively through,” he said.

“I think with the concerns about the potential for a second wave [of coronavirus cases] … these programs are going to remain in place because of the risk of further market dislocation.”

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