What Is an Unlimited Bond Purchase?

An unlimited bond purchase policy is initiated by a central bank which offers an open-ended commitment to purchase government bonds to prop up debt markets. Unlimited bond purchases are commonly viewed as an aggressive form of 澳洲幸运5官方开奖结果体彩网:monetary policy. These purchases help ensure credit maꦛrkets function with adequate liquidity and without erratic spikes in interest rates.

How Unlimited Bond Purchases Work

An unlimited bond purchase allows a central bank to prop up distressed 澳洲幸运5官方开奖结果体彩网:bond markets by committing to purchase as many bonds as necessary to stabilize the situation. In the United States, this action can be seen as an extension of the 澳洲幸运5官方开奖结果体彩网:open market operations conducted by the 澳洲幸运5官方开奖结果体彩网:Federal Reserve, in which the central bank buys and sells government securities on the 澳洲幸运5官方开奖结果体彩网:secondary market. The Federal Reserve’s open market operations can increase or decrease the supply of credit in the economy and maintain 澳洲幸运5官方开奖结果体彩网:liquidity.

If the Federal Reserve believes banks do not have an adequate money supply, it can supply that money by purchasing 澳洲幸运5官方开奖结果体彩网:Treasury securities from those banks. If the Federal Reserve thinks there is too much liquidity in the credit markets, it can reduce the money supply by selling more Treasuries in exchange for cash. The central bank aims to keep short-term interest rates within acceptable limits of its targeted 澳洲幸运5官方开奖结果体彩网:federal funds rate.

Examples of an Unlimited Bond Purchase

European Central Bank Program

In October 2012, 澳洲幸运5官方开奖结果体彩网:European Central Bank president, 澳洲幸运5官方开奖结果体彩网:Mario Draghi, used an unlimited bond purchase program to preserve the value of the euro amid the economic struggles of several eurozone countries.This decision stemmed from the 澳洲幸运5官方开奖结果体彩网:sovereign debt crisis that gripped several European countries following the global financial crisis in 2008. Greece, Spain, Ireland, Portugal, and Cyprus all required bailouts to avoid default in their sovereign bonds.

The fear of default drove yields higher on many government bonds, making it difficult for the central bank to execute monetary policy. The unlimited bond purchase program diversified the risk of distressed sovereign bonds throughout the eurozone.

Federal Reserve COVID-19 Response

The Fed took measures in 2020 to support the U.S. economy during the global COVID-19 pandemic. In March 2020, the 澳洲幸运5官方开奖结果体彩网:Federal Open Market Committee (FOMC) committed to purchasing Treasury securities in addition to the purchase of agency 澳洲幸运5官方开奖结果体彩网:mortgage-backed securities(MBSs). The central bank wanted to provide "support for critical market functioning."

The Fed also vowed to purchase corporate bonds of about 750 companies, including Apple, ExxonMobil, Microsoft, and AT&T. As of June 2020, roughly $429 million in corporate bonds were purchased to keep credit flowing and to allow companies to borrow at low rates. The move also aimed to help corporations keep from laying workers off during the pandemic.

The Bottom Line

Unlimited bond purchase programs are a form of monetary policy and involve open-ended commitments by central banks to purchase distressed government debt. These purchases are used to ensure adequate liquidity in the bond marke🍃t. During the 2008 financial crisis and the COVID-19 pandemic, global central banks used unlimited bond purchase programs to ensure market stability.