Quantitative tightening without the tightening: Is it in the price?

Plus, a new RBA Governor to be announced next month

John Kehoe had a story saying that the RBA and Treasury are considering a move to active selling of the RBA’s bond portfolio instead of the current approach of allowing the holdings to passively run-off its balance sheet as bonds mature. A review of the RBA’s approach was flagged in the May RBA Board minutes, which noted that ‘the Bank’s large holdings of government bonds exposed its balance sheet to a significant level of interest rate risk. Accordingly, members agreed it was appropriate to review the current approach periodically.’

Kehoe reports ‘any move to sell the bonds would be aimed at reducing interest-rate risk on the RBA’s $610 billion balance sheet and stemming potential further losses’ and ‘not aim to use QT as an active monetary policy tool to push bond yields higher or tighten financial conditions.’

His story also suggests that rather than selling the bonds directly into the secondary market, the RBA might sell them to the Treasury’s debt management arm, the Australian Office of Financial Management (AOFM). The thinking is that the AOFM is better placed to manage the run-off of the portfolio and coordinate this with its regular debt management operations. Any decision to move to active selling will be made after 30 September to assess the market impact of the banks repaying their Term Funding Facility loans.

The concern to minimise market disruption effectively recognises that a change in the current approach to QT might have an impact on bond market pricing. To that extent, it is not neutral with respect to financial and monetary conditions, even if it is not explicitly aimed at monetary tightening.