QE: It’s the monetary policy, stupid
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QE: It’s the monetary policy, stupid

Central bank risk, not political risk, should be bond investors’ primary focus.


Total assets held by the world’s major central banks stood at $18 trillion in April 2017.

This incredible figure includes the $4.9 trillion assets held by the People’s Bank of China. Aside from that, the Fed accounts for $4.43 trillion, the European Central Bank (ECB) $4.44 trillion and the Bank of Japan $4.52 trillion.

How this phenomenal volume of financial assets is eventually unwound is now perhaps the most important issue facing bond investors.

Indeed, while the markets wait for the first signs of a reduction in the Fed’s balance sheet next year, it is worth remembering that the US central bank now poised to exit quantitative easing (QE) actually has the smallest balance sheet of the lot.

The trillion-dollar question is whether or not the markets are prepared for the end of QE. Despite the market uncertainty that Donald Trump’s election precipitated, the Fed has so far rigorously stuck to the playsheet: having hiked twice since the election, a third rate hike in June is now priced in.

The adjustment in rates must be well under way before they do anything on the balance sheet, so they are widely expected to announce tapering of the actual balance sheet in December.

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