How billions of dollars of bonds will be traded between the Reserve Bank and Treasury

Reserve Bank details how it will unwind its QE programme. Photo / Supplied

The Reserve Bank of New Zealand has detailed exactly how it will go about selling the swathe of bonds it bought to stimulate the economy when Covid-19 came along.

The RBNZ effectively created money in 2020 and 2021 to buy $53 billion of New Zealand Government Bonds (debt) on the secondary market.

It became an active player in the bond market in a bid to put downward pressure on government bond yields, which affect retail interest rates.

The RBNZ stopped the bond purchases mid-last year once it saw the economy was recovering and decided it no longer needed to use quantitative easing to keep monetary conditions very loose.

In February, it announced that, rather than hang on to the bonds until maturity, it would sell $5b a year back to the Treasury's New Zealand Debt Management (NZDM).

The RBNZ said it wanted to reduce the size of its balance sheet to make it easier for it to potentially buy bonds in the future.

Today, it published a memorandum of understanding it has entered into with NZDM, which details how the sales will occur.

The RBNZ will sell the bonds in order of maturity date, starting with the longest maturity. Bonds with shorter maturities will mature without reinvestment or sale.

Sales will be on the 15th of every month, starting from July.

The bonds will be retired once NZDM buys them.

The RBNZ expects it will have sold all the New Zealand Government Bonds it bought as a part of its Large-Scale Asset Purchase programme by mid-2027.

It will keep the relatively small holdings of Local Government Funding Agency bonds it bought as a part of the programme until maturity.

The memorandum of understanding specifies the RBNZ reserves the right to change the rate of sales or halt sales should conditions change. The RBNZ doesn't expect such changes to be common.

The RBNZ will sell the bonds at the market rate. This will likely be less than what it bought them for.

The Treasury expects the RBNZ's buying and selling of bonds will make the Crown suffer a direct net loss of billions of dollars.

Quantitative easing or tightening is novel for New Zealand. The RBNZ is also taking a more aggressive approach than other central banks - at this stage at least - in downsizing its balance sheet.

NZDM is planning to issue more bonds than it otherwise would have to fund the $20b of bond buybacks.

It factored this into its latest forecast debt issuance programme, released alongside the Government's May Budget.

The $20b is a significant sum. By way of context, NZDM plans to issue a total of $90b of bonds in the four years to mid-2026.

New Zealand Government Bond yields rose after the RBNZ detailed how it will sell down its bond holdings.

However, ANZ and BNZ strategists, David Croy and Nick Smyth, confirmed the RBNZ's announcement was unsurprising and had been foreshadowed.

They said the lift in yields occurred against a backdrop of yields rising globally and a bond tender due to take place locally.