FAQ about extended purchases of securities
To mitigate the effects of the corona pandemic on the Swedish economy, the Riksbank intends to purchase securities in an amount of up to SEK 500 billion, up to 30 June 2021, in addition to the purchases planned prior to the pandemic. The purpose is to keep interest rates in general at a low level and contribute to an efficient supply of credit. Here we have collected frequently asked questions dealing with the Riksbank’s purchases of securities and replied to them.
Securities is a collective term for bonds, funds, equities and so on. The Riksbank's securities purchases include government bonds, mortgage bonds, corporate bonds and commercial paper as well as municipal bonds.
Why is the Riksbank purchasing securities to such a large extent?
We are doing this to keep the financial markets going. When the economy is turbulent, various types of assets lose value. If the Riksbank then purchases securities, for example government bonds, mortgage bonds and municipal bonds, demand increases for these securities. This leads to upward pressures on the price of the securities and to the return or yield on them thereby being pushed down. It could be said that the increase in demand means that the securities will not fall so much in price, which will reduce unease on the financial markets and increase stability in the system. At the same time, it will lead to lower interest rates.
When we purchase securities, for example bonds, these are converted into cash, which is to say liquidity in the form of “new” money on the banks’ accounts with the Riksbank. This therefore means that there will be a large surplus of money in the Swedish banking system. The banks can use this new money for transactions with each other, to lend to companies and households or to purchase other assets.
The Riksbank has decided to purchase different types of securities. What is the difference and what determines the type of security the Riksbank purchases?
Government, corporate, mortgage and municipal bonds all have different levels of risk. In well-managed countries, government securities have very low risk as the state can always, in principle, repay its debts by increasing taxes or reducing expenditure. Corporate and mortgage bonds, on the other hand, are riskier as the issuers can become insolvent more easily. This is why yields for these bonds are normally higher than they are for government bonds.
The type of security the Riksbank chooses to purchase depends on several factors. The Riksbank has already purchased a large share of all Swedish government bonds. Sweden’s national debt is also small in relation to GDP, compared with many other countries. This sets a limit for how many government bonds it is appropriate to purchase. Another important factor is demand for the various assets on the financial markets. For example, if demand for mortgage bonds decreases strongly, there may be reason to purchase these to support the mortgage market.
Why is the Riksbank now purchasing corporate and mortgage bonds when it has not done so previously?
The Riksbank has already purchased a large share of all Swedish government bonds. Sweden’s national debt is also small in relation to GDP, compared with other countries. This sets a limit for how many government bonds it is appropriate to purchase. Consequently, the Riksbank needs to purchase other assets too. By purchasing corporate bonds, we are improving credit supply to companies, and by purchasing mortgage bonds, we are also supporting the mortgage market. The purchases of municipal bonds help keep general interest rates down at a low level.
Which commercial papers has the Riksbank purchased?
For reasons of confidentiality, we cannot provide any information on which specific commercial papers we have purchased. If the Riksbank were to publish information on which specific commercial papers it holds or has purchased, this could affect the balance between companies on this market and risk damaging the functioning of the market. In other words, the publication of company-specific information would risk counteracting the purpose of the Riksbank’s purchases of commercial paper, which is to improve the functioning of the market – and thereby also the supply of credit to companies and the pass-through of monetary policy to the economy.
However, information is available on our website, Purchases of commercial paper, on the total volume of our purchases, and how much we have purchased in total over the course of the programme (published weekly), as well as our holdings (published monthly).