The Yield and Market Function Effects of the Reserve Bank of Australia's Bond Purchases*

Abstract

We examine the effect on government bond yields of three policy measures by the Reserve Bank of Australia implemented following the onset of the COVID-19 pandemic. We also assess their impact on bond market functioning. The measures were purchases to support government bond market function over early 2020, the yield target on 3-year Australian government bonds, and the bond purchase programme to lower longer-term yields from late 2020 through early 2022. For purchases to support market function, we find that the announcement lowered short-dated Australian Government Securities (AGS) yields but did not lower longer-dated AGS yields. We also find that purchases led to lower yields as and when they were implemented and that they supported market function by lowering bid–offer spreads. For the yield target, we find a substantial announcement effect and moderate implementation effects on yields. Conversely, the yield target appears to have detrimentally affected some aspects of the bond market function. For the bond purchase programme, we find an announcement effect of approximately 30 basis points for longer-term AGS yields; however, any implementation effects were small and temporary.