By Wolf Richter for WOLF STREET.
The Bank of Canada shed another $10 billion (all amounts in Canadian dollars) of Government of Canada bonds, bringing its GoC bond holdings down to $223 billion, the lowest since September 9, 2020 – a four-year anniversary and roundtrip – according to its latest weekly balance sheet, released Friday.
GoC bonds are by far the largest component of the BoC’s assets. Under its Quantitative Tightening program, the BoC has reduced its GoC bond holdings by 49% from the peak. The balance sheet has other components that we’ll look at in a moment, including repos, for which there has been some demand recently. Overall, the BoC has reduced its total assets by 52% from the peak.
The $10 billion GoC Bond roll-off occurred while the BoC cut its policy rates for the third time, sticking to the BoC’s announcement in April that QT would continue even as rates get cut.
In April, the BoC outlined a plan for how long QT will continue – possibly into September 2025 – and what might happen after QT ends – let more GoC bonds roll off and replace them with short-term GoC Treasury bills and repos during a “multi-year transition period.”
So after QT ends, possibly a year from now, the composition of the assets will change, with fewer longer-term GoC bonds and more short-term T-bills and short-term repos.
Under its QT program, whenever GoC bonds in its portfolio mature, the BoC gets paid face value for them, and they roll off without replacement. There is no cap (unlike at the Fed). Whatever matures, rolls off.
GoC bonds mature at the first of the month. There are months when nothing in the BoC’s portfolio matures (most recently, July and August), and there are months when a big bond issue matures and rolls off (for example, $23 billion in April).
The table below shows the maturity schedule of the BoC’s holdings of GoC bonds. The September maturity of $10 billion just rolled off (red). The blue figures denote the bond issues that recently rolled off. The black figures denote the future maturities. In October, another $4.1 billion bond issue will mature. And then there won’t be any maturities until March 2025.
If QT continues through September 1, 2025, as the BoC suggested in April, another $47 billion in GoC bonds will mature by then.
But there are – and were – other assets on the balance sheet.
In March 2020, the BoC started buying from a smorgasbord of assets, some of them in large amounts, and some of them in minuscule amounts. Some of them are now down to zero – they’re gone. Others continue to come off. And repos, which had provided a big part of the liquidity in 2020 then matured and went to zero in June 2022, have seen some activity again recently.
The chart below shows total assets (red), GoC bonds (gray), repos (blue), Treasury bills (gold), “Indemnity” (green), and a bunch of smaller stuff. More on all of them in a moment.
Total assets are now down by 52% from the peak, to $279 billion.
Note the uptick in total assets in July, when no GoC bonds rolled off, but repo activity increased – with currently $16 billion in repos still outstanding.
Repo activity restarted in 2024 and rose to $16 billion in July. On Friday’s balance sheet, repos were still at $16 billion.
Repos are demand based. With these repurchase agreements, the BoC lends against collateral, and charges interest. Its primary dealers are the counterparties that act as agent for indirect bidders.
The BoC explained that its rate-cut path kicked off a sudden demand for repos to fund bets on long-term bonds. Repos mature after short periods and then can be renewed at the BoC rate in effect at the time. As the BoC cuts, the carrying costs of those long-term bond bought earlier would decline with each rate cut, but interest income from the longer-term bonds would stay fixed after purchase, and bond prices would rise as market yields decline. So there’s a lot of demand for this trade (not without risks: funding long-term investments with short-term borrowing can backfire when interest rates rise).
Before the pandemic, the BoC carried about $13 billion in repos. During the first few months of the pandemic starting in March 2020, demand for repos exploded and topped out at $211 billion in June 2020. As the BoC flooded the land with money through its GoC bond purchases, demand for repos faded, and by June 2022 they were zero.
In the future, after QT ends, GoC bonds will continue to roll off, and repo balances will rise, along with T-bill balances, as the balance sheet shifts from GoC bonds to those two short-term liquidity instruments, according to the plan.
This increase from zero to $16 billion is why total assets ticked up in July:
Treasury bills are currently $0. Before the pandemic, the BoC held about $15 billion in short-term Canadian Treasury bills. In the early weeks of the pandemic QE ramp-up, it purchased large amounts of T-bills and brought the total balance to $140 billion by June 2020. It then let them mature and roll off and by March 2022 they went to zero. T-bills will start increasing as the BoC shifts its assets from GoC bonds to T-bills and repos.
“Indemnity” of $19.8 billion is the value of the indemnity agreements between the federal government and the BoC that represents the unrealized losses on the GoC bond holdings if the BoC sells them outright at today’s market prices, which it has no intention of doing. The amount will eventually go to zero, at the latest when all the bonds that are covered by it mature and roll off.
Other assets purchased during the pandemic.
Provincial Money Market: $0 since September 2021 (gold in the chart below).
Bankers’ Acceptances: $0 since August 2020. This money market instrument had spiked to $38 billion by April 2020 (gray).
Provincial bonds: $8.0 billion, down from $19 billion at the peak. They come off when the bond issues mature (red).
Canada Mortgage Bonds: $5.4 billion, down from $10 billion in November 2020. They come off when the bond issues mature (blue).
GoC Real return bonds (inflation protected securities): $4.3 billion down from $5.3 billion.
Corporate bonds: $0. It only purchased about $200 million to begin with, too little to show on this chart.
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