Abstract: There are four potential scenarios for the central bank's purchase of government bonds. After incorporating government bond transactions into its monetary policy toolkit, the People's Bank of China is most likely to use bond purchases as a liquidity management tool. To this end, this paper reviews the Federal Reserve's bond buying and selling practices prior to 2008, analyzing aspects such as trading rules, operational frequency, maturity distribution, and their impact on the bond market.
Through the analysis of the Federal Reserve's official statements and publicly available data, this paper presents three key findings. First, the Federal Reserve has a well-established process for open market operations involving government bonds, which includes pre-announcements, bidding, evaluations, post-notifications, and settlements. The trading rules are clear and effectively convey information to the market. Second, prior to 2008, the Federal Reserve's open market operations were characterized by direct purchases, low operational frequency, small purchase volumes, and a maturity distribution of bonds that matched the existing market supply. Third, the Federal Reserve's open market operations before 2008 had virtually no impact on the government bond market, a result achieved through careful management by the Federal Reserve.
On August 30, 2024, the Open Market Operations Department of the People's Bank of China announced: "In order to implement the requirements of the Central Financial Work Conference, in August 2024, the People's Bank conducted open market operations involving the buying and selling of government bonds, purchasing short-term government bonds and selling long-term government bonds from certain primary dealers. The net bond purchases for the month amounted to 100 billion yuan in face value." Since then, a new tool—government bond transactions—has been added to the monetary policy toolkit of the People's Bank. While the buying and selling of government bonds is a new endeavor for the Chinese central bank, it is a fundamental operation for other major central banks globally. Here, we aim to explore how the most important global central bank, the Federal Reserve, conducts its government bond purchases for reference.
