One of the defining features of “peak QE” was the extent to which central banks managed to drive the net supply of safe-haven and pseudo-safe-haven assets into negative territory.
That was, of course, by design. Central banks engineered a shortage, driving down yields and pushing investors out the risk curve and down the quality ladder.
This reached the height of its effectiveness during the 2017 low vol. bubble.
“It appears the central banks’ asset buying programs have stabilized markets and suppressed volatility to record low levels”, BofA wrote in August of 2017.
“Amid a growing stock of assets owned by central banks on a global scale, the free float of available assets has declined and thus volatility has subsided significantly”, the bank went on to muse.
That changed in 2018, as central banks continued down the road to normalization.
It was an ill-fated, short-lived journey, just as many analysts predicted it would be.
“We project that the private sector will have to absorb c.$1 trillion of securities [next year] the highest number since 2012”, Citi wrote in June of 2017, in the course of warning that the turning of the tide could be perilous for risk assets. “Central bank buying has reduced the net amount of securities (in DM) the market needs to absorb, both this year and last, to near zero”, the bank said, cautioning that in their estimation, that “played a critical role in propping up valuations at elevated levels”.
Fast forward to 2020 and, for the first time since 2016, the net supply available to private investors is set to fall. According to estimates from TD (which looked at Japan, the UK, Europe, the US, Canada and Australia), the global net supply of government bonds will drop 40% in the new year versus 2019.
This is, of course, due in part to the restart of net asset purchases by the ECB and the Fed’s organic balance sheet growth.
Ostensibly, this sets us back on the road to cross-asset volatility suppression, even as it raises the risks of liquidity events – although the sequestration of assets on central bank balance sheets de-risks the market, it arguably makes things more fragile, contributing to a landscape defined by long periods of almost unheard of tranquility and sudden bouts of extreme volatility (think “flash” events and “tantrums”).
The above also helps make the case for debt-funded fiscal stimulus. Bloomberg characterizes the demand for government bonds as “bottomless”. “The world’s biggest economies may roll over $8.7 trillion of debt maturing this year, but [it’s] not enough to sate huge appetite”, a new piece reads.
Well, as shown above, the more demand from central banks, the less supply available to satisfy the market’s “huge appetite”. One way to feed the hungry would be to simply issue more debt and use the proceeds to fund initiatives that would stimulate growth. As long as central banks are in the market, governments can go down that road without imperiling their “ex-CB” debt profiles, if you will.
Of course, the cynical among you will argue that there’s no such thing as an “ex-CB” debt profile – that the idea of central banks financing issuance in order to make room for more issuance is a one-way ticket to Weimar.
But if that’s the case – or if you really believe it’s the case – then why do you keep buying bonds?