(Bloomberg) --New Zealand's central bank is to begin selling the bonds acquired during its quantitative easing program back to the government, and intends to gradually dispose of all its holdings over the next five years.
Starting next month, the Reserve Bank will sell securities back to the Treasury Department's debt management office at a rate of NZ$5 billion ($3.2 billion) per fiscal year in order of maturity date, beginning with the longest duration, it said in a statement Thursday.
Sales will continue in a "gradual and predictable manner" until holdings have reduced to zero, which is expected to be in mid-2027, it said. Shorter-maturity bonds will mature without reinvestment or sales.
The plans are line with the RBNZ's initial indication in February, when it said it didn't expect the gradual unwinding of its bond holdings -- known as quantitative tightening -- to influence monetary conditions. Still, New Zealand bonds fell across the curve after today's statement, with the yield on 10-year debt hitting its highest level since June 2015.
"I would suggest that if anyone is selling bonds on today's RBNZ announcement, they have misread the situation," said David Croy, a senior strategist at ANZ Bank in Auckland. "Sales will be off-market. The technical details of the process that will be followed are all as I expected."
Central banks around the world are beginning to consider reducing balance sheets bloated by the quantitative easing they employed during the pandemic. Purchasing bonds helped to keep interest rates extremely low, insulating economies during the shock.
The RBNZ will be the first monetary authority to sell bonds, albeit back to the issuer. The Federal Reserve and Australia's central bank both plan to trim their balance sheets by not reinvesting the funds they receive from maturing securities.
The plans outlined today indicate the RBNZ will sell roughly half its bonds back to the Treasury while the other half -- short-dated debt -- won't be reinvested when it matures.
NZ$100b Program
The RBNZ bought NZ$53.5 billion of mostly government bonds during its so-called Large Scale Asset Purchase program. It ceased purchases in July last year, with just over half of the NZ$100 billion program completed, and began raising interest rates in October as it became clear the economy was overheating.
Reducing bond holdings will provide the RBNZ with more scope to use quantitative easing again in the future, the bank said today.
In a Memorandum of Understanding with New Zealand Debt Management, the RBNZ said it intends to sell NZ$415 million of bonds in each of the months from July through May, and the remaining NZ$435 million will occur in June each year. Sales will be executed on the 15th calendar day of each month.
The RBNZ said it reserves the right to change the rate of sales or halt them should conditions change, but does not expect such changes to be common. It said any impact on net bond supply has been incorporated into NZDM's issuance guidance provided in Budget 2022, and bonds that repurchased bonds will be retired.
"The Reserve Bank and NZDM will continue to collaborate closely to ensure the efficient functioning of the New Zealand government bond market," the RBNZ said.
(Adds comment from analyst.)
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