What Is an Unlimited Bond Purchase?

The term unlimited bond purchase refers to an intervention by a central bank, which offers an open-ended commitment to purchase government bonds in order to prop up debt markets. Unlimited bond purchases can be viewed as a particularly aggressive form of monetary policy, often with the goal of ensuring that the credit markets continue to function with adequate liquidity and without erratic spikes in interest rates.

Key Takeaways

  • Unlimited bond purchases are one of the ways that central banks can help ensure adequate liquidity in the bond market.
  • It is a rare and aggressive measure that may signal liquidity problems.
  • The European Central Bank undertook an aggressive program of unlimited bond purchases in response to the European sovereign debt crisis of 2012.

How Unlimited Bond Purchases Work

An unlimited bond purchase allows a central bank to prop up bond markets in crisis 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 open market operations conducted by the Federal Reserve, in which the central bank buys and sells government securities on the secondary market.

The Federal Reserve’s open market operations can serve to increase or decrease the supply of credit in the economy, to help ensure that adequate liquidity is maintained. For instance, if the Federal Reserve believes banks do not have an adequate supply of money, it can supply that money by purchasing Treasury securities from those banks.

Likewise, 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. Through these transactions, the central bank aims to keep short-term interest rates within acceptable limits of its targeted federal funds rate.

As central banks scrambled to respond to larger-scale crises, they have turned toward less-conventional methods. For example, the Fed implemented quantitative easing in the aftermath of the 2008 financial crisis to purchase trillions of dollars’ worth of debt securities to stabilize markets and bring yields back down. In this sense, the Fed acted as a so-called lender of last resort to prevent a breakdown of the credit markets. Extending a program of unlimited bond purchases is simply an extension of this strategy.

Real-World Example of an Unlimited Bond Purchase

European Central Bank Program

A prominent example of an unlimited bond-buying program took place in October 2012, when European Central Bank president, Mario Draghi, undertook such a program in an attempt to preserve the value of the euro amid the economic struggles of several eurozone countries. 

This decision stemmed from the sovereign debt crisis that gripped several European countries following the global financial crisis of 2008. Greece, Spain, Ireland, Portugal, and Cyprus all required bailouts to avoid default in their sovereign bonds.

The fear of default drove up yields on many government bonds, making it difficult for the central bank to execute monetary policy. While the central bank pledged it would not cap the size of the bailout, it did impose restrictions on the duration of debt it would buy and forced countries to formally request a bailout.

In effect, the unlimited bond purchase program diversified the risk of the distressed sovereign bonds throughout the eurozone. The action succeeded in bringing down interest rates on bonds issued by Spain and Italy, as markets perceived less risk with the central bank’s backstop in place.

Federal Reserve COVID-19 Response

The Fed took measures in 2020 to support the U.S. economy in the wake of the global COVID-19 pandemic. In March 2020, the Federal Open Market Committee (FOMC) committed to purchasing Treasury securities. This was in addition to the purchase of agency mortgage-backed securities(MBSs). The central bank said it would provide "support for critical market functioning."

The Fed also said it purchased 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 in order 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.