Bank of Canada Now Owns 40% of Government of Canada Bonds. Fed a Saint in Comparability. Taper on the Table

“They wonder if a potential mid-QE crisis is taking shape in Ottawa”: National Bank of Canada strategists in a note that would be funny if it weren’t so serious.

By Wolf Richter for WOLF STREET.

The National Bank of Canada’s business and strategy shop, the sixth largest bank in the country, sent a letter to customers today that would be funny if it didn’t point to such a serious and massive problem: it was celebrating “40” and referring to a 40th birthday, but instead of a birthday, it was referring to the Bank of Canada’s growing holdings of Government of Canada (GoC) bonds, which will account for an impressive 40% of all GoC bonds outstanding this Friday.

By comparison, the Fed holds 17.6% of all outstanding treasury stocks: it holds $ 4.94 trillion in treasury stocks, of which $ 28.1 trillion. We – that is the universal “we” which means “some of us” – lament the crazy buying of treasure stocks by the Fed and all the distortions and craziness it creates. But compared to the Bank of Canada, the Fed looks like a saint.

The Bank of Canada announced a few weeks ago, citing the moral hazard associated with its central bank nuttiness, that it would liquidate its crisis liquidity facilities and thereby reduce its total assets by around CAD 100 billion or around C $ 17 billion% from $ 575 billion at this point to $ 475 billion by the end of April. In October, the company began reducing its GoC bond purchases and is babbling about further reducing its GoC bond purchases. And the balance sheet total has decreased in the last two weeks:

The balance sheet total is falling because the liquidity facilities are being liquidated, including the maturity repos, which are now due one after the other and are struck off the balance sheet without replacement (black line), as well as the short-term Treasury bills of the Canadian government are falling and rolling off the balance sheet (purple line) ).

The portfolio of GoC bonds (red line) was increased further, albeit at a somewhat slower pace since October. The remaining asset classes – the brightly colored spaghetti at the bottom of the chart – have largely been wound up or are tiny. These GoC bonds will be the main topic in the future:

So here are chief interest rate and public sector strategist Warren Lovely and interest rate strategist Taylor Schleich of Economics and Strategy at the National Bank of Canada on their note [comments in brackets are mine]::

“With the completion of its final tranche of Canadian government bond purchases, the Bank of Canada has GoC bonds worth exactly $ 343.8 billion today (April 6th). There are currently $ 862.1 billion worth of Canadian domestic bonds, which means the stake of BoC owners is now within a hair’s breadth of 40%. This psychological threshold appears to be technically exceeded on Friday, April 9th.

“So that’s 40, and we felt it was appropriate to mark the milestone. We’re not really celebrating, mind you, but that’s exactly what happens when your age (or, in this case, the bond stake) increases. So put the streamers and balloons away. [The authors added this image].

“One wonders if a potential mid-QE life crisis is taking shape in Ottawa. How in, when, where and how quickly can oversized bond purchases be reduced? How much more unconventional support does the economy need? How much do bond purchases distort the market? When and how quickly will the Fed rejuvenate?

“That’s just a couple of questions, Tiff [BoC governor Richard Tiffany “Tiff” Macklem] and companies are probably thinking.

“It only took a year to radically change ownership of GoC bonds. Prior to COVID, the central bank held a fairly constant ~ 13% stake in outstanding positions, a position accumulated from participating in less than invasive / normal price auctions.

“Since the inception of the GBPP, however, the BoC stake has almost reached the major milestones of ownership. It exceeded 20% last May, exceeded 30% last September, and hit 40% this week.

“It is noteworthy that a QE decline slowed in October 2020 (from C $ 5 billion to C $ 4 billion per week), but did not stop the crowding-out on the GoC bond market.

“As more and more maturity repos expire, GoC bonds account for a larger proportion of total BoC assets (62% and more).

“In other words, central bank purchases offset 95% of the largely record-breaking net issues of GoC bonds in the last completed 2020-21 fiscal year – an absorption rate that is really difficult to overemphasize.” [meaning, in the fiscal year, the BoC has monetized 95% of net issuance of GoC bonds; one of the resulting distortions is Canada’s spectacular house-price inflation].

“Remove RRBs [inflation-adjusted Real Return Bonds]where the bank owns less than 5% and our central bank actually blew 40% of the nominal shares some time ago.

“With the emission set at moderate, additional tapering moves (plural) are required to stop the increase in BoC ownership.

“From our point of view, a steady reduction in QE could limit the BoC’s share to just under 45%. The BoC has the ability to do what most people want but are physically unable to do: stop the clock. After turning 40 on Friday, we hope this will be the last major BoC milestone that we need to realize. “

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