The BoC’s QT started much earlier and is way ahead of the Fed’s QT.
Wolf Richter for WOLF STREET.
The Bank of Canada’s balance sheet released Friday saw total assets of C$439 billion down 24% from the March 2021 peak of 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 funny-looking shape in a moment:
The largest categories of QE assets, defunct or introduced:
Repos: BoC repo holdings peaked in June 2020 at C$210 billion and then began to unwind. Most of them were gone by June 2021, and by June 2022 almost all were gone. There is now only C$400 million left waiting to mature (green line in chart below).
Canadian Treasury Bills: Short-term Canadian Treasury bills, which the BoC 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, it announced that it would let the repo go to zero, citing “moral hazard” as the reason. By September 2021, T-bills were mostly gone. They were completely gone by April 2022 and will remain gone to this day (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 BoC said it would completely end its MBS purchases due to concerns about a Canadian housing bubble. They have since decreased due to the principal transfer and remain a very small item, down to C$9 billion (yellow line).
Government of Canada (GoC) bonds.: This is the biggest, main tool of QE. In October 2020, the BoC announced that it would reduce its purchases of GoC bonds from C$5 billion per week to C$4 billion per week – but don’t call it “tapering”, she said at the time, although it was clear – old tapering.
In April 2021, by then holding 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 per week.
It laid down the hammer in October 2021. In a surprise move, with inflation surging, it announced it would completely end GoC bond purchases from November 1, 2021, allowing maturing bonds to go without compensation. There are no “caps” on the GoC bonds that are rolling. Whatever ripens, rolls off. The surprise announcement caused revenue to surge.
This was the start of his official QT, although total assets had already fallen a lot as repos and T-bills mostly disappeared.
The BoC’s holdings of GoC bonds peaked at C$435 billion at the end of December 2021 and have fallen 12.6%, or $54 billion, to C$381 billion in the eight months since then (red line).
“Indemnification:” Losses from securities held.
Note the brown line in the chart above – now the second largest asset, “Compensation”. This is the estimated value of the compensation contracts between the Federal Government and the BoC. It represents the estimated losses on securities held by the BoC if it were to sell them at current prices, which would then be reimbursed by the federal government.
As part of this quantitative easing frenzy that began in March 2020, the federal government agreed to compensate the BoC for any actual losses incurred on its bond portfolio. Those losses were expected to pile up when bond yields started to rise, as they have since early 2021.
The BoC establishes the loss estimate as an asset on this balance sheet. If the BoC actually gets paid by the government for these losses, the amount will be reduced by compensation. This account is a form of claim owed to the BoC by the federal government for losses on bonds held.
As revenues increase, these losses increase. When yields fall, losses fall (all bondholders experience this). During the summer bear market rally that lasted in Canada and also in the US from mid-June to mid-August, yields fell and bond prices rose.
But this rally ended in mid-August. Since then, yields have risen and bond prices have fallen, with estimated losses rising again.
The chart below shows the details of these estimated replacements based on estimated losses. These replacements peaked on the June 15 balance sheet at C$35 billion. After that, as revenues fell and losses fell, so did the value of the guarantees, bottoming out at C$26 billion on the Aug. 10 balance sheet. Then they started running again. They jumped back to C$31 billion in the Aug. 24 balance sheet released Friday:
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