BoC’s QT started much earlier and is way ahead of Fed’s QT.
By Wolf Richter for WOLF STREET.
On the Bank of Canada’s balance sheet released Friday, total assets of C$439 billion were down 24% from their peak in March 2021 (C$575 billion). In comparison, the Fed’s balance sheet peaked in April 2022. The BoC’s Quantitative Tightening (QT) essentially started in April 2021 and is well ahead of the Fed’s QT. We’ll get to the details and fun shape in a moment:
Major categories of QE assets, gone or rolling by:
Rest: The BoC’s repo holdings peaked in June 2020 at C$210 billion, then began to unwind. Most of them were gone by June 2021, and by June 2022 almost all were gone. Now only C$400 million is left, waiting to mature (green line in the chart below).
Canada’s Treasury Bill: The short-term Canada T-bills that the BoC started buying in March 2020 peaked in July 2020 at C$140 billion. At that point the BoC started letting them roll off the balance sheet as they matured. In March 2021, it announced it would let them and repos go to zero, citing “moral hazard” as the reason. In September 2021, the treasury bills were mostly gone. In April 2022, they were completely gone, and remain 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 in late 2020. In October 2020, the BoC said it would stop buying MBS altogether, concerned about the Canadian housing bubble. They have since decreased due to the payments of the principal and are still a very small item, down to C$9 billion (yellow line).
Government of Canada (GoC) bonds: This is the biggie, the most important QE tool. In October 2020, the BoC announced that it would reduce its purchases of GoC bonds from C$5 billion a week to C$4 billion a week—but don’t call it “tapering,” it said at the time, even if it was single-old tapering.
In April 2021, when it held 40% of outstanding GoC bonds, it reduced its purchases of GoC bonds to C$3 billion, citing “signs of extrapolative expectations and speculative behavior” in the housing market. In July 2021, the BoC reduced its purchases to C$2 billion a week.
In October 2021, it put down the hammer. In a surprise move, with inflation rising, it announced it would end purchases of GoC bonds altogether, starting November 1, 2021, and would let maturing bonds roll out without replacement. There is no “cap” on the GoC bonds rolling off. Whatever ripens, rolls off. The surprise announcement caused returns to rise.
This was the beginning of the official QT, although total assets had already fallen a bunch because repos and T-bills had largely disappeared.
The BoC’s holdings of GoC bonds peaked at the end of December 2021 at C$435 billion and in the eight months since have fallen by 12.6%, or by $54 billion, to C$381 billion (red line).
“Compensation:” Loss of securities holdings.
Notice the brown line in the chart above – now the second largest asset, “Replacement.” This is the estimated value of the compensation agreements between the federal government and the BoC. It represents the estimated losses from the securities holdings of the BoC if it were to sell them at current prices, which it would then be reimbursed by the federal government.
As part of this QE madness that started in March 2020, the federal government agreed to indemnify the BoC for any actual losses on the bond portfolio. Those losses were expected to pile up when bond yields begin to rise, as they have since early 2021.
The BoC sets up the estimate of the losses as an asset on this balance sheet. If the BoC is actually paid by the government for these losses, the amount is reduced by the refund. This account is a form of a claim, which the federal government owes the BoC for the losses on its bond holdings.
As returns rise, these losses rise. When interest rates fall, losses fall (all bondholders experience this). During the summer bear market rally that lasted in Canada, as well as in the United States, from mid-June to mid-August, interest rates fell and bond prices rose.
But this rally ended in mid-August. Since then, interest rates have been rising and bond prices have fallen, and the estimated losses have also increased again.
The chart below shows the details of the estimated damages, based on the estimated losses. These replacements peaked on the balance sheet dated June 15 at C$35 billion. Then, as yields fell and losses fell, so did the value of the indemnities, bottoming out at C$26 billion on the balance sheet dated Aug. 10. Then they took off again. On the balance sheet dated August 24, released on Friday, they jumped back to C$31 billion:
Do you like reading WOLF STREET and want to support it? Using ad blockers – I totally understand why – but do you want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced tea mug to find out how:
Would you like to be notified by email when WOLF STREET publishes a new article? Sign up here.