QE comes to SA as Reserve Bank steps in to provide liquidity to the market

25 Mar 2020

Patrick Lawlor

Content editor, Investec

The SA Reserve Bank (SARB) on Wednesday adopted new measures to support liquidity in the local market.  We look at the implications of the SARB's undertaking to make unlimited purchases of SA government bonds across the yield curve.

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LISTEN: Investec Treasury economist Tertia Jacobs provides an indepth analysis into the South African Reserve Bank's annoucemnet of quantitative easing.

The South African Reserve Bank has announced quantitative easing (QE) which is a practice that was introduced by many leading central banks in the global financial crisis to buy bonds and other assets in the open market. 

According to the SARB the move "will commence a programme of purchasing government securities in the secondary market. The purchases will be conducted across the yield curve. (These) measures will be implemented until liquidity conditions normalise." 

Following the SARB announcement, bond yields fell (yields and prices are inversely related) while the rand strengthened in response to the news, as well as to improved global market sentiment, following further market intervention by US Federal Reserve and the announcement of a US$2 trillion rescue package.

The SARB committed to continue the programme until “liquidity conditions normalise”. The move followed the decision by the SARB to cut the repo rate by 100bps (one percentage point) last week.

After trading at R17.56 to the US dollar early on Wednesday, before strengthening to R17.26 after the announcement.

The 10-year R2030 bond traded at around 11.3% after the news, having closed the previous day at 12.4%. 

Tertia Jacobs, Treasury Economist at Investec, says the move was precipitated after bond market participants experienced a liquidity squeeze over the past few weeks in the funding markets, due to distress funding needs for cash collateral in the shadow banking system.

 

“While rand liquidity, as reflected in the size of the money market shortage, has remained unchanged, funding markets and specifically the repo market, has come under pressure,” Jacobs points out.  

 

Jacobs says the liquidity squeeze came about after primary dealers had to absorb a significant amount of bonds over the past three weeks. “Funding in the repo market dried up and trading in the primary and secondary market was disrupted. SA government bond yields consequently surged to unsustainable levels that required SARB intervention,” she says.

 

Jacobs says the SARB measures can be summarised as follows:

 

Term repos: The SARB is offering three-month term repos in addition to the weekly main refinancing operation. The interest rate is 30bps over the repo rate. Market conditions will determine if more adjustments, such as maturities of up to 12 months, are required.

Bond purchases: The SARB will buy government bonds in the secondary market from primary dealers. In this way, the banks will be provided with more liquidity and to help create stability. The SARB open market operations to buy government bonds could lead to a structural decline in the money market shortage.

 

About the author

Patrick Lawlor

Patrick Lawlor

Editor

Patrick writes and edits content for Investec Wealth & Investment, and Corporate and Institutional Banking, including editing the Daily View, Monthly View and One Magazine - an online publication for Investec's Wealth clients. Patrick was a financial journalist for many years for publications such as Financial Mail, Finweek and Business Report. He holds a BA and a PDM (Bus.Admin.) both from Wits University.