SMM News: the era of quantitative austerity among the world's major central banks has proved to be short-lived.
An analysis of the balance sheet by Bloomberg Economic Research shows that net bond purchases by the Federal Reserve, the European Central Bank and the Bank of Japan will return to above zero starting in September. This comes just 11 months after they reversed the previous decade of stimulating the economy through quantitative easing (QE).
Wall Street and the White House may be happy about it. Many traders blamed the Fed for scaling back its stimulus measures, which led to a sharp fall in the stock market at the end of 2018. U.S. President Donald Trump has also repeatedly attacked the Fed, tweeting on Friday (37. 58, 0. 81, 2. 20%) to warn him that "crazy quantitative austerity must stop."
For investors, the shift in policy, coupled with a tendency to lower interest rates, reinforces their case for buying bonds. That could add momentum to the rally in the bond market, where average global bond yields have fallen nearly 1 percentage point since November, generating nearly $13 trillion in negative yields and raising expectations that 10-year Treasury yields could also hit zero. And falling bond yields tend to push investors back to the stock market.
The end of quantitative tightening in the US is likely to come at a time when the Fed is cutting interest rates for the first time since 2008.
Since the Fed reversed its quantitative easing policy in October 2017, it has reduced its holdings of Treasuries by about $370 billion, compared with a balance sheet of $4.5 trillion in 2015. As the Fed ends its contraction, its holdings of Treasuries will start to pick up later this year. At the same time, it plans to return to holding only Treasuries before the crisis, slowly replacing the $1.5 trillion mortgage-backed securities (MBS) with Treasuries.
Wells Fargo (46.480.450.98%) estimates that the Fed's holdings of Treasuries will increase by more than $2 trillion over the next decade and that its balance sheet will exceed its all-time peak. Analysts at the bank predict that the Fed will choose to focus some of its new purchases on short-term Treasuries, which, together with other factors, will steepen the yield curve.
"the Fed's plan for the balance sheet is to shift from MBS to Treasuries and, given the guidelines it gives, should buy some short-term Treasuries," said Mike Schumacher, a Wells Fargo strategist. "this will lead to a steepening of the yield curve."
As for the European Central Bank, institutions such as Bloomberg Economic Research expect it to announce another bond purchase in September. The baseline scenario is that the ECB starts net asset purchases of 45 billion euros a month for a period of one year starting in the fourth quarter.
Benoit Coeure, a member of the ECB's executive board, said this month that policymakers could hypothetically restart asset purchases if circumstances required. Goldman Sachs (214,0.48,0.22 per cent) and Morgan Stanley (126.96.36.199 per cent) also expect the central bank to return to QE.
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