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Bernard & Jarrod: RBNZ wants banks to step up

Bernard Hickey talks to Kiwibank chief economist Jarrod Kerr about the latest retail spending data and the Reserve Bank's call for banks to step up as market-makers for corporate and local government bonds.

In their latest daily 'Bernard Zooms out to lunch with Jarrod' video, Bernard Hickey and Jarrod Kerr talk about the latest card spending data for March showing a dive in spending on eating out and drinking, but a surge in grocery shopping.

They also listen to Bernard's interview with Reserve Bank Assistant Governor Christian Hawkesby, who calls on the big banks to step up as market-makers to unfreeze local government and corporate bond markets.

Bernard asked Hawkesby if the Reserve Bank would further widen its bond buying to corporate bonds and quasi-Government bonds such as for Kainga Ora and Auckland Airport. It announced on Tuesday it would extend its $30b Government bond buying programme to include a further $3b in Local Government Funding Agency (LGFA) bonds.

"We've shown ourselves to be very open minded and to monitor the markets very closely and be ready to take actions when required," Hawkesby said.

"What we are expecting to see is that our actions here will have benefits much broader than just the LGFA. We're expecting to see improved liquidity, not just in that issue, but in the broader corporate bond market in the sense that as we buy those bonds, take those bonds off the inventories of dealers and the market of asset managers, that frees up liquidity and enables them to switch in to other issuers with a clearer transparency about where where markets are trading," he said.

"So that's what we're looking to see as a next step. A really key component of that is banks really stepping up their role as intermediaries in these credit markets. We're taking actions to provide assistance, but that also requires cooperation from the banks who are the market makers and the liquidity providers in these markets to step up as well."

Hawkesby said he expected the banks to come back as market makers and to tighten bid-offer spreads.

"What we had seen, was the dealers and corporate bond market  one-by-one stepping out on the basis that the inventories were full. They weren't willing to take on any more risk, they weren't willing to show bids to any other players on the market. And therefore volume freezes up, turnover freezes up and there's a lack of transparency around where corporate bond yields are actually trading," he said.

"So what we need we need to see is those market makers come back into the market to build up their inventories, take on risk, show prices. Narrow those bid and offer spreads so we actually see some activity occurring and we think that we will enable that to happen by virtue that we are a large scale buyer of New Zealand government bonds and the LGFA, and that takes a lot of inventory off their hands and frees them up to step back into these other pockets of New Zealand's debt capital markets."

Hawkesby said the initial signs were promising.

We've seen very quickly liquidity come back into that part of the corporate bond market. So we've seen bid offer spreads narrow. We've seen more bids and offers than the broker for those securities. We've also had feedback that there is more activity occurring in other similar types of issuers with more bids and offers for those as well. So early days we're seeing promising signs and we would like to see much more of that going forward."

'The right man for the job'

Kerr said Hawkesby's experience as a bond fund manager at Harbour Asset Management before taking on his role at the Reserve Bank last year meant he had the right experience for the Reserve Bank's asset buying programme, which is described elsewhere as Quantitative Easing.

Hawkesby also worked for nine years at the Bank of England, where he held senior positions, including Private Secretary to the Deputy Governor, Chief Manager of the Sterling Markets Division and Head of Market Intelligence. During the Global Financial Crisis, he was part of the team created to resolve British bank failures. He also led the scheme to restore liquidity to the British corporate bond market, and advised on the creation of the Bank of England's own quantitative easing programme.

This is part of a daily 'Bernard and Jarrod Zoom out for Lunch' webinar series during the lockdown. 

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