The BoC QT started much earlier and is well ahead of the Fed QT.
By Wolf Richter for WOLF STREET.
On the Bank of Canada’s balance sheet released on Friday, total assets of C$439 billion were down 24% from the 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 fun shape in a moment:
The largest categories of QE assets, gone or in progress:
Deposits: BoC repo holdings peaked in June 2020 at C$210 billion, then started to unwind. Most of them had left by June 2021, and by June 2022 almost all had left. Now there is only C$400 million left, awaiting maturity (green line in the chart below).
Canada Treasury Bills: Short-term Canadian treasury bills that the Bank of Canada started buying in March 2020 peaked in July 2020 at C$140 billion. At that point, the BoC started letting them off the balance sheet as they matured. In March 2021, he announced he would drop them to zero, along with pensions, citing “moral hazard” as the reason. By September 2021, Treasuries were mostly gone. By April 2022, they had totally disappeared and still are 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 Bank of Canada said it would stop buying MBS entirely, worried about the Canadian housing bubble. They have since declined due to passed-on principal payments and remain a very small item, up to C$9 billion (yellow line).
Government of Canada (GC) Bonds: This is the biggie, the first QE tool. In October 2020, the Bank of Canada announced that it would reduce its purchases of Government of Canada bonds from C$5 billion per week to C$4 billion per week – but don’t call it a “cutback” , she said at the time, although it was clear-old tapering.
In April 2021, when it held 40% of outstanding Government of Canada bonds, it reduced its purchases of Government of Canada bonds to C$3 billion, citing “signs of extrapolative expectations and behavior speculative” in the housing market. In July 2021, the BoC reduced its purchases to C$2 billion per week.
In October 2021, he laid down the hammer. In a surprise move, with inflation soaring, he announced that he would end his purchases of Government of Canada bonds entirely, effective November 1, 2021, and allow maturing bonds to retire. without replacement. There are no “caps” on Government of Canada bonds that are cancelled. Everything that matures, rolls. The surprise announcement caused yields to surge.
This was the start of his official QT although total assets had already fallen significantly because repos and Treasuries had mostly disappeared.
The BoC’s holdings of Government of Canada bonds peaked at the end of December 2021 at C$435 billion and declined by 12.6%, or $54 billion, to C$381 billion (red line) as of over the next eight months.
“Compensation”: losses on its securities holdings.
Note the brown line in the chart above – now the second largest asset, “Compensation”. This is the estimated value of the indemnification agreements between the federal government and the Bank of Canada. It represents the estimated losses on the BoC’s holdings of securities if it were to sell them at current prices, losses which would then be reimbursed to it by the federal government.
As part of this QE madness beginning in March 2020, the federal government agreed to compensate the Bank of Canada for any actual losses incurred on its bond portfolio. Those losses were expected to pile up when bond yields start to rise, as they have since the start of 2021.
The BoC establishes the loss estimate as an asset on this balance sheet. If the Bank of Canada is actually paid by the government for these losses, the amount is reduced by the reimbursement. This account is a form of claim, owed to the Bank of Canada by the federal government, for losses on bond holdings.
As yields increase, these losses increase. When yields go down, losses go down (all bondholders experience this). During the summer bear market rally that lasted in Canada, as well as the United States, from mid-June to mid-August, yields fell and bond prices rose.
But that rally ended in mid-August. Since then, yields have risen and bond prices have fallen, and estimated losses have also risen again.
The table below presents the details of these estimated indemnities, based on the estimated losses. These indemnities peaked on the June 15 balance sheet at C$35 billion. Then, as returns and losses declined, the value of claims also declined, hitting a low of C$26 billion on the August 10 balance sheet. Then they started again. On the balance sheet dated August 24, published Friday, they jumped to 31 billion Canadian dollars:
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