RBC Gives Its Update on Bank of Canada's Balance Sheet

07:12 AM EDT, 07/11/2025 (MT Newswires) -- The Bank of Canada announced the end of quantitative tightening (QT) at its Jan. 29 meeting, alongside an extra 5bps cut in the deposit rate (-30bp in total), noted RBC.

Term repos started on schedule in early March and have been running every two weeks since then. Take-up has been on the low side, with no fully subscribed operations, said the bank.

There has been essentially no attention from the BoC on term repo take-up because CORRA has been consistently setting around target in recent months, stated RBC. The extra 5bps cut in the deposit rate has been instrumental in achieving this.

However, the bank thinks the low-term repo take-up will lead to the start of BoC bill purchases next month, ahead of the large Sept. 1 maturity. This will serve to better align replacement asset purchases with maturities on the BoC balance sheet and provide a new (returning) buyer for Government of Canada (GoC) bills that will allow bill issuance to rise to cover additional government financing requirements.

Although recent term repo operations have seen some increases, term repo take-up has generally been underwhelming -- currently $8.9 billion outstanding versus $21 billion offered, pointed out RBC. Since the announced end of QT, there have been $17.6 billion of GoC bond maturities.

So, term repos aren't coming close to replacing maturing bonds at this stage, though this is unlikely to be an issue for the BoC. However, this will become an issue relatively soon, with $25.8 billion of Sep25s maturing from the BoC balance sheet on Sept. 1, warned the bank.

The BoC will likely want to spread out the addition of replacement assets around that maturity.

When the BoC announced the end of QT, it said bill purchases would "resume later this year," noting that the timing "will ultimately depend on the evolution of the Bank's balance sheet, including take-up of the term repo program."

Based on the term repo discussion above and the upcoming September maturity, the bank thinks BoC bill purchases can start any time now, and RBC estimates the Aug. 12 bill auction as the first to see BoC purchases.

The lower term repo take-up also suggests bills may need to be a higher proportion of the BoC's balance sheet, at least temporarily. RBC believes the BoC buying 15% of bill auctions (three-, six-, one-year terms, not one-month) is reasonable, which translates to a build-up to $45 billion over a full year given a current bill stock of around $300 billion. To put this number in context, there are $63 billion in BoC balance sheet maturities from September 2025 to September 2026 (inclusive).

The BoC stepping in to buy GoC bills would support additional federal funding needs being channeled to the bill space without increasing the float to the market, added RBC. While this decreases the potential for a further rise in GoC bond issuance, the bank has highlighted previously that net bond issuance is already well above previous highs.

This means RBC's trade recommendations that take advantage of high bond issuance -- short GoC versus United States Treasuries and swap spread tighteners -- still make a lot of sense. In bill space specifically, the BoC coming in to buy should help Bill-OIS spreads tighten from somewhat elevated levels.

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