RBA buys record $840m in mortgage-backed bonds

October 1, 2008

Australia's central bank bought a record $840 million of mortgage-backed bonds, joining the government's bid to bolster confidence in the market.

The Reserve Bank of Australia acquired the home-loan bonds in nine and 13-day repurchase agreements, according to a statement today. That follows Treasurer Wayne Swan's Sept. 26 announcement the government would spend $4 billion buying mortgage securities to revive a frozen market.

``They are trying to engender confidence in this particular asset class'' said David Goodman, credit analyst at Westpac Banking Corp. in Sydney. ``They're happy to hold them as collateral.''

The central bank and government are buying mortgage-backed bonds to support Australia's asset-backed debt market after losses tied to US subprime securities caused investors to flee. Australia's six biggest banks all bought bonds backed by their own mortgages in preparation to swap them for cash with the central bank if they need emergency funding.

Central banks typically buy securities including mortgage-backed debt from primary dealers in repurchase agreements, or repos, for a set period, temporarily raising the amount of money available in the banking system and bringing money-market rates closer to their targets. At maturity, the securities are returned to the dealers and the cash to the central bank.

The Reserve Bank in September lengthened to a year the period it will lend cash in exchange for mortgage-backed bonds, amid rising funding costs for banks.

Bloomberg News