Posts Tagged: qe


Just with words, Mario Draghi, European Central Bank president, dazzled bond markets.

What will happen when he actually acts?

His announcement on January 22 of eurozone “quantitative easing” led to another big lurch down in government borrowing costs. Yields, which move inversely with prices, are now negative on German bonds with maturities of up to six years. Yields on 10-year Spanish and Italian bonds have fallen even faster than German equivalents.

This week’s ECB meeting in Cyprus will set the stage for QE implementation this month. So far Mr Draghi has been coy about details, even about exactly when asset purchases will start — with good reason: how the ECB manages its bond buying will largely determine where yields head next. In turn, that could prove crucial in determining whether his ambitious programme is perceived as succeeding and likely to pull the eurozone back from the brink of dangerous deflation. >> Read More


Everyone knows the positives, or rather positive, even if nobody at the ECB is willing to come out and say it: the ECB’s QE – whose structural details were laid out previously - will boost stock prices, and… that’s it. Who benefits as a result of this has now become a socioeconomic and philosophical discussion.

So here, courtesy of ADMISI’s Marc Ostwald, are the negatives:

  • Risk sharing is very limited, with national central banks taking 80% of the risk on sovereign bond purchases, and rather un-reassuring was Draghi’s comment that “most national central banks have adequate buffers to absorb a negative event” – most being how many.
  • Not good news for Greece, while it and Cyprus will be eligible for purchases of govt under a ‘waiver’ for (bail-out) ‘programme countries’, the ECB already has a very high volume of Greek bonds on it balance sheet from the SMP programme, and given a limit on total holdings for each sovereign issuer, it will not be eligible for purchases until it redeems debt in July asnd August. It should be added that other Italy and Spain and other bail-out countries will implicitly also have a lower available volume of total purchases, until SMP holdings are redeemed.
  • BUT perhaps the key aspect relates to the limits on the 25% limit on purchases of a single issue, which ensures that the ECB adheres to the ECJ’s ruling about the ECB ensuring that is does not interfere with “price formation“. So here’s the key aspect, there are some $12.0 Trln of FX reserves in the world, of which roughly a quarter are held in Euros. Operating on the traditional metric that roughly half of those will be invested in Govt Bills and Bonds, this means that FX reserve managers will have to be involved in the process of establishing prices for whatever is purchased under the Govt bond QE programme. Eminently anything that is sold by central banks will not find its way into the private financial sector, therefore that EUR 60 Bln figure may often overstate what is being injected into the market.
  • Last but not least, the expanded programme does not start until March 15, so “Mr Market” now has a very long waiting period to sit on holdings of EUR debt before selling to the ECB, and with plenty of event risk in the world, starting with the Greek election, and to mention the prospect of an imminent Ukrainian default. Sort this under an uncomfortably long period before the QE ‘party’ gets started.

On the assumption that a full-blown quantitative easing (QE) plan is introduced

Alan Ruskin, a strategist at Deutsche Bank

If all the ECB is doing is taking the balance sheet back up to levels seen in 2012, why should QE now be more effective than the balance sheet expansion measures in the past?

Anthony O’Brien, a fixed-income analyst at Morgan Stanley

What’s next?

David Bloom, head of currency strategy at HSBC

Having raised rates twice in 2011 and now having to embark on a massive QE programme, if you were the Fed Chair would you be raising rates this year?

Kit Juckes, strategist at Societe Generale

How will you measure ‘success’ for sovereign bond-buying? Are you hoping for a strong performance from asset markets, or a pick-up over time in inflation expectations or do these policies only work if they feed through into stronger private sector growth?

Jens Nordvig, head of currency strategy at Nomura

What defines monetary financing? What constraints on quantitative easing are necessary to avoid messing with that?

Ralf Preusser, head of European rate strategy at Bank of America Merrill Lynch. >> Read More


Albert Edwards admits that his “über bear” reputation is well deserved, at least with respect to equities, an asset class he has dismissed for the last 10 years. His bearishness has not abated, and for the coming year, he fears that “deflation will overwhelm the west.”

Markets, he said, will riot.

Edwards is the chief global strategist for Société Générale and he spoke at that firm’s annual global strategy conference in London on January 13. Andrew Lathrope, the firm’s head of global quantitative strategy, and Dr. Marc Faber, the publisher of the Gloom Boom & Doom Report, also spoke.

Global markets face three risks, according to Edwards: bearishness in the U.S. government bond market, a flawed confidence that the U.S. is in a self-sustaining recovery and undue faith in the relationship between quantitative easing (QE) and the equity markets.

Deflation is the main threat, though, according to Edwards. “This is the year the markets really panic about deflation. You haven’t had that panic yet.” >> Read More


Bank of Tokyo-Mitsubishi on the prospects for ECB QE and the euro:

  • The 11.8% depreciation of the euro versus the dollar in 2014 was the largest since the 12.6% decline in 2005, notes Bank of Tokyo-Mitsubishi (BTMU).
  • “We were somewhat surprised by the degree of euro selling into the end of 2014 fuelled in part by the increased expectation of sovereign debt QE by the ECB. We like most in the market expect the ECB to announce a QE program at the next meeting on 22nd January,”
  • “We now expect a sovereign debt QE program of at least EUR 500bn to be announced in January. At least that amount is required in order to expand the balance sheet to the EUR 3trn level reached in early 2012,”
  • “The greater the QE sum is above the EUR 500bn level, the greater the scope for further EUR/USD selling,”
  • “The added political uncertainty at the outset of 2015 mixed with the high probability of the launch of sovereign debt QE will result in a further weakening of the euro. We show a bias for a more pronounced weakening in the first half of the year as US market interest rates finally respond to pending FOMC tightening,”

    BTMU sees EUR/USD at 1.15 in 6 months and 1.12 by the end of the year.

BOJ meeting Minutes released now

25 November 2014 - 6:00 am

The Minutes from the BOJ October 31 meeting:

  • Many BOJ members said the BOJ to keep easing until inflation is stable
  • BOJ will check risks, make adjustments as needed
  • Japan economy continued to recover moderately
  • Many members said if downward pressure on prices remained there was a risk that the shift in deflation mindset could be delayed
  • Inflation to be around 1% for some time
  • Kuroda proposed additional easing
  • One member said if the BOJ had not expanded QE it could be seen as breaking its commitment to its price target
  • One member said expanded QE is sufficient to meet 2% price target in second half of 2015 fiscal year
  • One member said if price target in sight debate about exit strategy would be possible
  • BOJ should explain that QQE is open-ended
  • Some members said extra easing size should be as big as possible, need to avoid easing being seen as incremental
  • Some said the effects of more easing not worth the costs, saw maintaining previous policy as appropriate, said virtuous cycle was being maintained

Full text is here


A funny thing happened on the way to the ‘end’ of the multi-trillion dollar bond buying program known as QE – the Fed chronicles. Aside from the shift to a globalization of QE via the European Central Bank (ECB) and Bank of Japan (BOJ) as I wrote about earlier, what lingers in the air of “post-taper” time is an absence of absence. For QE is not over. Instead, in the United States, the process has simply morphed from being predominantly executed by the Federal Reserve (Fed) to being executed by its major private bank members. Fed Chair, Janet Yellen, has failed to point this out in any of her speeches about the labor force, inflation, or inequality. 

The financial system has failed and remains a threat to us all. Only cheap money and the artificial inflation of asset values can make it appear temporarily healthy. Yet, the Fed (and the Obama Administration) continue to perpetuate the illusion that making the cost of (printed) money zero by any means has had a positive effect on the population at large, when in fact, all that has occurred is a pass-the-debt-ponzi-scheme co-engineered by the Fed and big US bank beneficiaries. That debt, caught in the crossfires of this central-private bank arrangement, is still doing nothing for American citizens or the broader national or global economy. 

The Fed is already the largest hedge fund in the world, with a book of $4.5 trillion of assets. These will plummet in value if rates rise.  Cue the banks that are gearing up their own (still small in comparison, but give them time) role in this big bamboozle. By doing so, they too are amassing additional risk with respect to interest rates rising, on top of all their other risk that counts on leveraging cheap money.

>> Read More

Bernanke heats up the EM bond market

27 September 2013 - 17:40 pm

The latest weekly flows data from fund-tracker EPFR Global confirm anecdotal evidence that the Fed’s surprise decision to maintain QE encouraged investors to stuff cash into higher-risk and emerging markets.

Highlights from Royal Bank of Scotland’s analysis of the EPFR data, for the week ending Sept 25, look like this:

  • The EM Fixed Income asset class saw inflows after seventeen consecutive weeks of outflows.
  • EM equity flows also continue to impress, having observed strong inflows for three weeks running
  • Flows into high yield bond funds surged, doubling from the previous week.
  • Developed markets equities, by contrast, saw small outflows after record inflows in the prior week.

One trend in the data that’s particularly encouraging is that investors are being selective rather than indiscriminate. RBS writes:

There was a substantial drop in EM real money fund allocations to Turkish and South African local currency bond funds during the month, while Russia was able to attract its highest allocations since June 2008. In hard currency space Russia also outperformed along with Hungary, whose allocations rose to the highest level on record. In contrast, allocations to Ukrainian hard currency bond funds are now at their lowest levels in seven months. >> Read More


Last Wednesday, the Federal Reserve shocked markets with a surprise decision to refrain from beginning to taper back the pace of its bond-buying program known as quantitative easing.

 In the press conference following the decision, Fed chairman Ben Bernankecited the recent rise in long-term interest rates - spurred by Bernanke’s previous press conference in July, during which he seemed to endorse it – as a reason for the delay. Rates had risen too far, too fast, and they were presenting a threat to sustainable economic growth.

Nomura chief economist Richard Koo calls this a “QE ‘trap’ of [the Fed's] own making,” writing in a note to clients that the Fed’s decision last week is a clear sign that a “vicious cycle of rising rates and economic weakness has already emerged.”

The yield on the 10-year U.S. Treasury note rose as high as 3.0% in the weeks before the Fed announced its decision not to taper. >> Read More


If QE is working, why is bank credit contracting?

q   Since May 2013 US bank credit has contracted at a 3% annualised rate. 
q   In Euroland, bank lending to the private sector is contracting at 3% this year. 
q   Lower exchange rates and higher interest rates spell lower growth in emerging 


QE has not made baby boomers borrow more and save less q   The ageing baby-boom generation (48-67) is saving more, borrowing less and 
    reducing debt as they head into retirement.

q   Under-48s have too much student debt; and with balance sheets damaged by 
    falling property prices, they cannot gear up to offset the baby boomers’ delevering. 
q   Real personal disposable-income growth is at levels associated with recessions, 
    bond yields are rising and inflation falling. >> Read More

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Technically Yours,
Team ASR,
Baroda, India.