The Bank of Canada expanded its new bond-buying program Wednesday to include purchases on the open market of long-term provincial and corporate debt, stepping in to aid provinces and big businesses in tapping strained credit markets for sorely needed funds.
In its regularly scheduled interest rate announcement, the bank unveiled a plan to buy up to $50-billion of provincially issued bonds with remaining terms to maturity of up to 10 years. The move adds to a commitment the bank announced in late March to purchase up to 40 per cent of every new provincial government issue of debt with terms of one year or less. Both programs will help ease access and cost of the provinces’ heavy borrowing needs brought on by the crisis.
The bank also announced that it will purchase up to $10-billion of investment-grade corporate bonds with remaining terms of up to five years.
Both programs should be in operation by early May, and will run for 12 months. The bank said both could be expanded “if conditions warrant.”
The provincial and corporate bond programs expand the strategy of large-scale asset purchases that the Bank of Canada introduced less than three weeks ago, when it announced a plan to buy a minimum of $5-billion a week of Canadian government bonds in the open market. That was considered the bank’s first entry into quantitative easing, a form of unconventional monetary policy in which a central bank injects funds directly into the market.
“We know that over the next weeks and months, there will be extra demands put on those markets by the cash-management needs of governments, both federal and provincial,” Governor Stephen Poloz said in a news conference Wednesday. “When people are demanding more liquidity than normal, it’s our job to provide more liquidity than normal.”
The provincial bond purchases will go a long way to help the market digest the significantly increased amounts of debt that provincial governments will have to take on this year to deal with the COVID-19 response – providing steady demand that will help tone down the interest rates on that debt.
Ian Pollick, global head of fixed income, currency and commodities strategy at CIBC World Markets, estimated that provincial treasuries will need to raise a collective $130-billion in the bond market in the next 12 months – roughly 50 per cent more than in the past year.
“What that means is that you’re taking out, as a marginal buyer, a very large proportion of that incoming debt," Mr. Pollick said. "The program definitely has some teeth.”
Bank of Canada Senior Deputy Governor Carolyn Wilkins said the liquidity measures taken by the bank over the past few weeks “really helped unblock some of those markets” that were in danger of seizing up under the pressures of the crisis. “That being said, I wouldn’t pretend that the conditions in markets – particularly the term markets, past one year – are particularly functioning well,” she said.
“The programs that we introduced today will contribute to that."
Both provincial and corporate debt have faced elevated yield spreads since the COVID-19 crisis hit the bond markets, as investors have fled from riskier assets and the markets have demanded a significantly higher premium for those debts.
The new bond purchase programs are small relative to the bank’s commitment to buy Government of Canada bonds, which it has pledged to continue “until the economic recovery is well under way.” If those purchases run for a year at the current minimum, they would add at least $260-billion to the bank’s balance sheet.
While some provincial premiers have been looking to Ottawa to deliver some relief for their sudden surge in fiscal pressures, Mr. Poloz insisted the central bank wasn’t asked by the federal government to come to the aid of the provincial debt market.
“No one has asked us to do anything on the provincial front,” he said. "What we are looking at, though … is a provincial bond market that is still showing significant signs of strain – that is, a market not functioning well.”
The bank left its key interest rate unchanged at 0.25 per cent in Wednesday’s announcement, after three cuts to the rate in March that reduced it from 1.75 per cent as the economic fallout from the pandemic escalated. The bank has signalled that it considers this level to be the practical floor for its interest rates.
In the announcement, it added that it will temporarily increase the amount of Canadian government treasury bills it buys at auction to “up to 40 per cent, effective immediately.”
In the news conference, Mr. Poloz reiterated that he won’t stay on as governor beyond the expiration of his seven-year term on June 2. The Globe and Mail reported last week that the federal government hadn’t asked him to consider an extension in light of the COVID-19 crisis.
"I think we can go ahead and continue this [selection] process, which, I guess, it must be something like 90-per-cent complete,” he said.
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David Parkinson