QT at the Bank of Canada: Assets Down 24% from Peak. Spiraling Losses on Bonds, to Be Paid for by Canadians


The BoC’s QT started much earlier and is well ahead of the 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 March 2021 peak (C$575 billion). By 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 the funny-looking shape in a minute:

Largest categories of QE assets, gone or rolled out:

Repos: The BoC’s repo holdings peaked at C$210 billion in June 2020 and then began to unwind. Most were gone by June 2021, and by June 2022 they were almost all gone. Now there is only C$400 million left, waiting to mature (green line in the chart below).

Canada Treasury Bill: Short-term Canadian Treasury bills that the BoC began buying in March 2020 peaked at C$140 billion in July 2020. That’s when the BoC started rolling them off the balance sheet as they matured. In March 2021, it announced it would let them and repos go to zero, citing “moral risk”. By September 2021, the Treasury bills had largely disappeared. By April 2022, they had completely disappeared and remain gone today (purple line).

MBS: The BoC has 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 entirely, concerned about Canada’s housing bubble. Since then, they have declined due to the pass-through principal payments and remain a very small item, down to C$9 billion (yellow line).

Canadian Government Bonds (GoC): This is the biggie, the main QE tool. In October 2020, the BoC announced it would reduce its GoC bond purchases from C$5 billion a week to C$4 billion a week — but don’t call it “winding down,” it said at the time, though it was clear. old tapered.

In April 2021, when it held 40% of GoC bond outstanding, it reduced its GoC bond purchases 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 per week.

It put down the hammer in October 2021. In a surprise move, with inflation soaring, it announced that it would end its GoC bond purchases entirely from November 1, 2021, and will run maturing bonds without replacement. There are no “caps” on the GoC bonds rolling off. What ripens, rolls away. The surprising announcement caused a spike in revenues.

This was the start of its official QT, although total assets had already fallen quite a bit as repos and Treasury bills had largely disappeared.

The BoC’s GoC bond holdings peaked at C$435 billion in late December 2021 and declined 12.6%, or $54 billion, to $C381 billion (red line) in the following eight months.

“Damage:” Losses on his securities holdings.

Notice the brown line in the chart above – now the second largest asset, ‘Indemnification’. 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 securities holdings if it were to sell them at current prices, which it would then reimburse by the federal government.

As part of this QE craze that began in March 2020, the federal government agreed to reimburse the BoC for any actual losses on its bond portfolio. These losses are expected to pile up as bond yields begin to rise, as they have since early 2021.

The BoC prepares the estimate of the losses as an asset on this balance sheet. If the BoC is actually paid for these losses by the government, the amount is reduced by the compensation. This account is a form of a claim owed to the BoC by the federal government for the losses on the bond holdings.

If revenues rise, those losses rise. If interest rates fall, losses diminish (all bondholders experience that). During the summer bear market rally, which lasted from mid-June to mid-August in both Canada and the US, yields fell and bond prices rose.

But this rally ended in mid-August. Since then, yields have risen and bond prices have fallen, and estimated losses have risen again.

The chart below shows the details of those estimated compensation, based on the estimated losses. These fees peaked on the June 15 balance sheet at C$35 billion. As yields fell and losses fell, so did the value of claims, reaching a low of C$26 billion on the August 10 balance sheet. Then they rose again. On the August 24 balance sheet, released Friday, they jumped back to C$31 billion:

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The Valley Voice
The Valley Voicehttp://thevalleyvoice.org
Christopher Brito is a social media producer and trending writer for The Valley Voice, with a focus on sports and stories related to race and culture.


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