Zhang Tao/Text After the macro decision of "enriching the monetary policy toolbox and gradually increasing the purchase and sale of treasury bonds in the open market operation of the central bank" was clarified, the central bank's treasury bond trading became the attention of the market, and triggered a discussion on whether to carry out quantitative easing. To this end, the central bank publicly responded that "the trading of treasury bonds in the secondary market can be used as a liquidity management method and a reserve of monetary policy tools", and "in practice, the buying and selling of treasury bonds will also be 'two-way', and it may be a buying operation or a selling operation according to the needs of regulation and control and market supply and demand", that is, it is clear that buying and selling treasury bonds is not quantitative easing.
In view of this year's "Government Work Report" proposed that "from this year onwards, it is planned to issue ultra-long-term special treasury bonds for several consecutive years, specifically for the implementation of major national strategies and security capacity building in key areas, and issue 1 trillion yuan this year", in this context, the market will inevitably not have a reverie about the central bank's treasury bond trading, and even if the policy level has made a clear response, but in view of the fact that the purchase and sale of treasury bonds involves the central bank and finance, monetary policy and fiscal policy, therefore, there is still a lot worth thinking about for the central bank to carry out treasury bond trading.
First of all, the positioning of buying and selling Treasury bonds
The "Overview of Open Market Business" published by the PBOC on its official website on November 29, 2013 clearly states that the bond transactions of the People's Bank of China's open market business mainly include repurchase transactions, cash bond transactions and the issuance of central bank bills, while the trading of treasury bonds in the secondary market is a cash bond transaction. Therefore, buying and selling government bonds is not the creation of a new policy tool.
By definition, open market operations are the main monetary policy tool for the central bank to handle base money and regulate market liquidity, with the aim of achieving the goal of monetary policy regulation. At present, the central bank holds a balance of 1.5 trillion yuan in government bonds, but at that time, it was also engaged in foreign exchange transactions at the same time as its bond purchases, and the purpose of the operation was mainly to set up CIC's capital, that is, to make up for the fiscal balance through coordination between the central bank and the treasury – the result was that the central bank increased its treasury bond assets and base currency liabilities and expanded its balance sheet, rather than regulating market liquidity. Broadly speaking, the bond purchase operations in quantitative easing in advanced economies – increasing government bonds on the asset side, increasing base money on the liability side, and expanding balance sheets – focus on the reserve of policy instruments, and the purpose of the operation is also not liquidity management.
Therefore, from the perspective of tool positioning and actual operation, there are two positions for buying and selling treasury bonds: liquidity management and monetary policy tool reserves, and whether the trading of treasury bonds focuses more on which position depends on the actual operation of the central bank. According to the recent central bank emphasis, the buying and selling of government bonds is "two-way", that is, it is more focused on liquidity management, that is, it does not expand the balance sheet continuously.
Second, the market impact of buying and selling Treasury bonds
Unlike the central bank's repo operations, the impact of buying and selling Treasury bonds on the market is more complex. At present, the central bank's repurchase operation is a pledged repo, and the repurchase comes with an exit mechanism, so the signal reflecting the policy is very clear, that is, each operation will give a clear policy statement on the scale of liquidity injection and the level of short-term interest rates, and then have an impact on the bond market and the yield curve of the treasury bond.
Buying and selling government bonds means that the central bank will directly participate in market transactions, and then release complex policy signals. Every transaction of the central bank may be understood by the market as an interest rate policy declaration, the more varieties of treasury bonds traded by the central bank, the more interest rate signals will be released, and the central bank as a monetary bank, the theoretical impact on the transaction price of individual bonds is absolute.
Similar logic, in the period when the central bank hedged excess liquidity by issuing central bills, the maturity of central bills was only 3 months, 6 months, 1 year and 3 years, which may be to avoid too many maturity periods, and will release too many interest rate signals.
For the market, the central bank's treasury bond trading not only directly affects market supply and demand, but also may release a lot of interest rate signals, and even the interest rate transmission mechanism will change, and the impact on the market will be extremely complex, which will inevitably interfere with the central bank's monetary policy. Policies that directly affect the yield curve, such as the Federal Reserve's reversal operation (OT) and the Bank of Japan's yield curve control policy (YCC), are implemented on the premise that they are forced to choose after the failure of the normal monetary policy transmission mechanism.
Third, the impact of buying and selling Treasury bonds on the central bank
In terms of the issuance and trading of treasury bonds, the issuance of treasury bonds by the Ministry of Finance is "financially non-neutral" - the pursuit of lower financing costs; The buying and selling of treasury bonds by market institutions is also "financially non-neutral" - the pursuit of maximizing the efficiency of asset allocation. However, the central bank's behavior of buying and selling treasury bonds involves not only the supply of base money, but also the bond yield, and more importantly, the balance of assets and liabilities of the central bank itself, so it is extremely difficult and complicated to judge whether the central bank's trading of treasury bonds is financially neutral.
The homogeneity of economic growth and money supply requires that when maintaining economic growth, money supply needs to maintain a certain growth rate, which is also the goal of our current monetary policy control. As a direct result of this change, the value of central bank assets is affected by changes in the market. For example, if the yield rises, the valuation of the central bank's bond assets will face a floating loss, and if the yield falls, the valuation of the central bank's bond assets will float to a profit. This is also a common problem in advanced economies after the implementation of quantitative easing – central bank asset values can interfere with monetary policy.
If the central bank strictly adheres to "financial neutrality" when buying and selling Treasury bonds, that is, the central bank is always the price taker when buying and selling Treasury bonds, then the valuation of the central bank's assets will inevitably be affected by its monetary policy, in other words, changes in the central bank's interest rate policy will affect the value of its assets, which in turn may affect the central bank's profits (mainly seigniorage). During the epidemic, in order to support the real economy, the 1 trillion yuan of profits accumulated by the central bank has been used to make up for the gap between fiscal revenue and expenditure. Like other market participants, the central bank should also be "financially non-neutral", and the central bank, as a central counterparty, is naturally a price-setter, but this will inevitably distort the interest rate policy signal and transmission mechanism.
To sum up, the central bank does need to maintain a more flexible policy posture in the actual operation of buying and selling treasury bonds, and our evaluation of it also needs to be observed and understood for a longer time.
(The author works for the Financial Market Department of China Construction Bank, and this article is only a personal opinion)