The BoC’s QT started much earlier and is well ahead of the Fed’s QT.
By Wolf Richter for WOLF STREET.
In the Bank of Canada balance sheet released Friday, total assets of C$439 billion are down 24% from the peak in March 2021 (C$575 billion). By comparison, the Fed’s balance sheet peaked in April 2022. The BoC’s QT essentially started in April 2021 and is well ahead of the Fed’s QT. We’ll get to the details and how to funny look at a time:
Largest categories of QE assets, defunct or disappearing:
Repos: BoC repo holdings peaked in June 2020 at C$210bn and then began to fade. Most of them had left in June 2021 and in June 2022 almost all of them had left. Now there is only 400 million Canadian dollars left awaiting maturity (green line in the chart below).
Canadian Treasury Bills: Short-term Canadian Treasury bills that the BoC began buying in March 2020 peaked in July 2020 at C$140 billion. At that time, the BoC started to let them go off balance sheet when they matured. In March 2021, it announced that it would let them and the repos go to zero, citing “moral hazard” as the reason. By September 2021, most Treasury bills were gone. By April 2022, they were completely gone and are still gone today (purple line).
MBS: The BoC never bought many of these “mortgage bonds” to begin with. They peaked at just under C$10 billion at the end of 2020. In October 2020, the BoC said it would stop buying MBS altogether, concerned about the Canadian housing bubble. Since then, they have decreased due to transferred capital payments and remain a very small item, at up to CAD 9 billion (yellow line).
Government of Canada Bonds (GoC): This is the main problem, the main QE tool. In October 2020, the BoC announced that it would cut its Government of Canada bond purchases from C$5 billion a week to C$4 billion a week, but don’t call it a “cut,” it said at the time, though it was clear. old narrowing.
In April 2021, at which point it owned 40% of outstanding Colombian Government bonds, it reduced its purchases of Colombian Government bonds to C$3 billion, citing “signs of extrapolated expectations and speculative behavior” in the real estate market. In July 2021, the BoC reduced its purchases to 2 billion Canadian dollars per week.
In October 2021, he laid down the hammer. In a surprise move, with inflation rising, he announced that he would stop buying Colombian Government bonds altogether, effective November 1, 2021, and would allow maturing bonds to be written off without replacement. There are no “limits” on the GoC bonuses that accumulate. Everything that matures, rolls out. The surprise announcement sent yields soaring.
This was the start of its official QT, although total assets had already fallen a lot as repos and treasury bills were mostly gone.
The BoC’s holdings of Government of Canada bonds peaked at the end of December 2021 at 435 billion Canadian dollars and in the eight months since then have shrunk by 12.6%, or 54 billion Canadian dollars. million dollars, to 381 billion Canadian dollars (red line).
“Indemnification:” Losses in your holding of securities.
Note the brown line in the chart above – now the second largest asset, “Indemnity.” This is the estimated value of the indemnity agreements between the federal government and the BoC. It represents the estimated losses on the BoC’s holdings of securities if it were to sell them at current prices, which would then be reimbursed by the federal government.
As part of this QE craze starting in March 2020, the federal government has agreed to indemnify the BoC for any actual losses incurred on its bond portfolio. These losses were expected to accumulate when bond yields started to rise, as they have been doing since early 2021.
The BoC lists the loss estimate as an asset on this balance sheet. If the government actually pays the BoC for these losses, the amount is reduced by reimbursement. This account is a form of account receivable, owed to the BoC by the federal government, for losses on bond holdings.
When returns increase, those losses increase. When yields fall, losses go down (all bondholders experience that). During the summer bear market rally that lasted in Canada, as well as the US, from mid-June to mid-August, yields fell and bond prices rose.
But this rally ended in mid-August. Since then, yields have been rising and bond prices have been falling, and estimated losses have also risen again.
The following table shows the detail of said estimated indemnities, based on the estimated losses. These indemnities reached their maximum point in the balance dated June 15 at C$35 billion. Then, as yields and losses fell, the value of claims also fell, reaching a low of 26 billion Canadian dollars on the balance sheet on August 10. Then they took off again. In the balance sheet dated August 24, published on Friday, they rose again to 31,000 million Canadian dollars:
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