In the beginning of the health crisis that hit Israel and the rest of
the world, there were massive withdrawals in Israel’s capital market from
government bond funds at institutional investors’ funds in general, and at mutual
funds in particular.
·
In that situation, temporary “price pressures” developed, as market
participants required a premium to buy the government bonds. Evidence of this
can be seen in the gradual reversal of prices to the levels of early March
toward the end of the month.
·
Using daily mutual fund data as an estimate for these flows indicates
that not all of the transitory increase in yields can be attributed to the
price pressures of the government bond mutual funds or to the change in yields
abroad, and that it probably also derived from other frictions in this market
and/or from changes in information regarding the state of the economy and risk
premiums.
·
It is reasonable to assume that the Bank of Israel lowered the premium
to investors who wanted to sell the bonds in the market by effectively becoming
a liquidity provider in the secondary market.
·
The Bank of Israel’s main impact on yields was at the time of the
announcement on March 23 of its undertaking to purchase NIS 50 billion of
government bonds. High frequency analysis shows that yields on the 10-year
government bond have decreased by about 11 basis points right after the Bank of
Israel's main announcement. This outcome is consistent with an examination conducted
at the Bank regarding the Bank of Israel’s intervention in the government bond
market in 2009.
·
Indirectly, the Bank of Israel apparently also reduced the costs of
issuing government bonds, companies’ costs of issuing corporate bonds, and
households’ costs of raising funds during that period.
Background
The
Bank of Israel works to maintain the stability and proper functioning of the
financial system. During the course of the coronavirus crisis, the Bank adopted
several policy measures to ensure the proper functioning of the financial
markets, to deal with liquidity difficulties that adversely impacted the
financial system, to ease the terms of credit in the economy, and to support
economic activity and financial stability. As part of this, the Bank acted
through several channels, beyond reducing the interest rate to its historically
lowest level—injecting liquidity into the bond market through repo transactions
with bonds as the security, supporting the foreign exchange market via NIS/$ swaps,
assisting with increasing the supply of credit to small and micro businesses by
extending designated loans to the banking system, and reducing credit costs in the
economy via the purchase of government bonds, as will be described in further
detail in this document. The Bank of Israel constantly examines the effect of
the steps and continues to follow the developments, and will use additional tools
to the extent necessary in order to continue supporting economic activity.
From
the beginning of the health and economic crisis that occurred at first abroad
and then in Israel, massive withdrawals were seen in March from government bond
mutual funds, which at times serve as a safe haven for investors, at
institutional investors in
general and the mutual funds in particular (Figures 1, 2 and 3).