Extended purchases of securities

During the year, the Riksbank intends to buy securities for up to an additional SEK 300 billion. The aim is to facilitate credit supply and mitigate the downturn in the economy. Here we have collected common questions and answers dealing with the Riksbank’s purchases of securities.

Securities is a collective term for bonds, funds, equities and so on. The Riksbank plans to purchase government bonds, municipal bonds and mortgage 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.

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.

How much does the Riksbank currently own in securities and what are the implications of the Riksbank’s plans to purchase another SEK 300 billion?

The Riksbank presently owns government bonds in a nominal amount of almost SEK 340 billion, which means that, if the new purchases are carried out as planned, this amount will almost be doubled. Extensive purchases are thus being planned.

If necessary, the Riksbank will purchase government, municipal and mortgage bonds. What is the difference and what determines the type of security the Riksbank purchases?

Government, municipal and housing bonds have different risks. 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. Mortgage bonds, on the other hand, have a higher risk 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 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 mortgage bonds, we are also supporting the mortgage market.

The Riksbank is reducing the lending rate for overnight loans to banks from 0.75 to 0.20 percentage points above the repo rate. What does this mean?

Put simply, this means that the banks can lend money overnight at the Riksbank at lower interest rates than previously. This helps strengthen the financial system and improves the functioning of the fixed-income markets. It is therefore a measure aimed at avoiding a worsening of the economic consequences of the corona pandemic due to problems in the credit supply.

The Riksbank is offering the banks the opportunity to borrow an unlimited amount of money on a weekly basis against collateral at three months’ maturity at an interest rate of 0.20 percentage points above the repo rate. What does this mean and what do you hope to achieve?

This means that the banks can borrow money from the Riksbank at a low interest rate for a longer period, which is to say three months. This measure aims to strengthen the financial system and improve the functioning of the fixed-income market.

The Riksbank is increasing flexibility over the collateral the banks can use when borrowing money from the Riksbank. What does this mean and what do you hope to achieve?

The banks will have greater possibilities to use mortgage bonds as collateral when they borrow from the Riksbank. This makes it easier for the banks to borrow from the Riksbank and helps dampen unease on the financial markets.

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Updated 23/03/2020