Gao Zhanjun: Understanding the Central Bank's Moves in the Government Bond Market (AI Translation)

【周刊提前读】高占军：如何解读央行买卖国债

At the end of October 2023, the Central Financial Work Conference emphasized the need to enhance the monetary policy toolkit. This sparked intense discussions about the central bank's trading of government bonds, driven by falling government bond yields and frequent operations by the People's Bank of China (PBOC) [para. 1][para. 2]. The "Government Bond Trading Business Announcement" by the PBOC on August 30, 2024, revealed net bond purchases worth RMB 100 billion during that month. This announcement has generated widespread debate among market participants and academics [para. 2].

There is a debate regarding whether these Treasury transactions resemble Operation Twist (OT), Yield Curve Control (YCC), or Quantitative Easing (QE). Operation Twist involves selling short-term bonds and purchasing long-term ones to lower long-term interest rates, historically implemented in the U.S. in 1961 and post-2008 financial crisis [para. 3][para. 5]. In January 1961, President Kennedy’s administration, facing a recession, sought to stimulate the American economy with a loose monetary policy. Still, they faced the challenge of higher European interest rates, leading to currency arbitrage and gold outflows [para. 6]. To address this, the Federal Reserve and Treasury implemented OT: the Fed purchased long-term bonds, and the Treasury issued more short-term debt to lower long-term rates without compromising short-term rates, thereby compressing the term spread [para. 7].

In 2010, a similar approach was taken with the $600 billion Treasury purchase program (QE2), where the objectives were to lower long-term interest rates without reducing short-term rates by purchasing significant amounts of long-term Treasury securities, funded through short-term government debt [para. 8].

Yield Curve Control (YCC), another monetary policy tool, was employed in the U.S. during World War II to keep short-term and long-term bond yields within specific limits [para. 9]. Similarly, the Bank of Japan implemented YCC in 2016, targeting a 10-year government bond yield of zero with allowable fluctuations, which was later adjusted until the policy ended in 2024 [para. 10]. The Reserve Bank of Australia also attempted YCC in 2020 to lower financing costs, but it was prematurely ended in 2021 due to its ineffectiveness [para. 11].

The author's analysis suggests it is challenging to unequivocally categorize the PBOC's August treasury transactions. Though the "buying short and selling long" strategy can influence the yield curve’s shape, it significantly differs from OT and YCC in direction and intent. The PBOC has not set a target range for long-term interest rates through these operations [para. 12]. The net purchase of RMB 100 billion appears more a result of routine open market operations without fixed targets, making it hard to liken this to traditional QE [para. 13]. Without explicit announcements from the PBOC, it is premature to draw definitive policy conclusions based on a single month's bond transactions [para. 14].

The author, Gao Zhanjun, posits that the primary goals behind PBOC’s operations could be ensuring financial stability and facilitating the interest rate transmission mechanism. Achieving these goals depends on market perception, the PBOC's operational strategies, and the effective use of its various tools [para. 15].

Gao Zhanjun is a Distinguished Senior Research Fellow at the National Institution for Finance and Development (NIFD). The article is excerpted from the forthcoming September 9th issue of Caixin Weekly [para. 16][para. 17].