Central Banks have a mandate to promote the effective operation of the economy. One of the critical functions is to uphold the stability of the financial system and minimise and contain systemic risks. For example, in response to the Covid-19 crisis in 2020, the Federal Reserve (Fed) acted decisively to stabilise the Treasury and mortgage-backed securities (MBS) markets, initially committing to buying USD 500 billion in Treasuries and USD 200 billion in MBS, later making these purchases open ended. In its effort to support market liquidity and funding, the Fed also bolstered its USD swap lines, re-launched the Primary Dealer Credit Facility, expanded the scope of its existing repurchase agreement operations, temporarily relaxed regulatory requirements for banks and established new facilities to support the flow of credit to US corporations. More recently, in 2022, the Bank of England (BoE) intervened to protect UK financial stability following severe dysfunction in the UK government bond market. The extreme rout was triggered by the government’s unfunded fiscal statement, which exposed vulnerabilities in liability-driven investment funds. For 13 working days, the BoE purchased UK government bonds with a backstop pricing approach where dysfunction was greatest. In total, the central bank bought GBP 12.1 billion of conventional long-end gilts and GBP 7.2 billion of inflation-linked gilts, and restored market order. Importantly, the highly targeted scheme could deliver the maximum impact on financial market conditions with minimum impact on output and inflation—a key point as inflation was running above 10% in the UK at the time. Recent US asset movements have been rapid and large, but not yet extreme enough to warrant Fed intervention. Like the Fed, we will be closely monitoring bond market metrics like bid-ask spreads, market depth and relative value measures.
