The operation of QE by central banks is getting ever more confused

One of the problems of an era that involves markets mostly front-running central banks is when there are rumours of a change, as markets are then left wondering what to do? This happened yesterday when Bloomberg in particular started to push a suggestion that the ECB ( European Central Bank) was going to reduce or taper its sovereign bond buying.

The European Central Bank will probably gradually wind down bond purchases before the conclusion of quantitative easing, and may do so in steps of 10 billion euros ($11.2 billion) a month, according to euro-zone central-bank officials.

Accordingly there was a lot of focus on a move from the current 80 billion Euros a month to 70 billion Euros a month. This was quite a change as at the last ECB press conference Mario Draghi had given a clear impression that the central bank was in fact looking at ways of addressing this.

The Governing Council has tasked its committees with considering adjustments to QE, such as loosening self-imposed rules that make some bonds ineligible.

For those who have not followed this issue so many bond yields in Germany in particular are yielding below the -0.4% Deposit Rate that is used as the threshold. Accordingly there is a shortage of German bunds to buy meaning that it may not be able to buy much more than the 255 billion Euros worth it has purchased at the end of September. As you can see the formation of committees to look at this was seen as an example of this below.

They didn’t exclude that QE could still be extended past the current end-date of March 2017 at the full pace of 80 billion euros ($90 billion) a month.

So there you have it which is that ECB will either be tapered or extended. They have of course forgotten that it might stay the same! Just to add to the land of confusion we also discovered this.

“The Governing Council has not discussed these topics, as President Mario Draghi said at the last press conference and during his recent testimony at the European Parliament,” the ECB said in an e-mailed statement.

Italy issues a 50 year bond

Perhaps the most nervous group yesterday were those who heard news of the possible ECB Taper after just buying some of the new Italian 50 year bond. Here are the details from the Wall Street Journal.

Italy sold €5 billion ($5.6 billion) of debt in its debut 50-year-bond issue in a further sign of how much economic stress investors will overlook amid the global hunt for yield.

There were more than €18.5 billion of orders Tuesday for the bonds that mature in 2067 and that were priced at a yield of 2.85%, according to people familiar with the deal. The strong demand allowed the Italian treasury to raise more than the roughly €3 billion to €4 billion that analysts had expected.

Those investing were no doubt hoping for a continuation of the bond market rally which has seen investors in long-dated bonds around Europe do very well in 2016. But as the WSJ points out there are particular issues for Italy.

But the case for investing in long-dated Italian debt isn’t as clear-cut as for some of the country’s eurozone neighbors. Italian lenders are at the center of concerns over bad loans in the European banking system. Investors also cited a referendum scheduled for December as a vote of confidence in Italian Prime Minister Matteo Renzi that could rattle markets. Meanwhile, economic growth in Italy has stagnated.

Actually as I have pointed out before economic growth in Italy has (sadly) pretty much carried on as it has throughout the Euro era. As to why investors might be piling into long-dated Italian debt well here is the rationale.

“The search for yield is one key reason,” said Axel Botte, a fixed-income strategist at Nataxis Asset Management.

The yield on Italy’s 50-year bond looks high in relative terms, Mr. Botte said, and there is demand for long-dated securities from institutional investors such as pension funds that need to match their liabilities.

This is to some extent back stopped by the ECB purchases of Italian government bonds which at the end of September totalled some 176 billion Euros and might have been expected to accelerate by some as the supply of German bonds faded. A bit different to a Taper for those hoping for something like this.

Spain’s 2066 bonds, which were sold with a yield of 3.493% in May, yield 2.55%. Yields fall as prices rise.

In other words those who bought the Spanish bonds cleaned up.Of course extrapolating from a past profit is very dangerous and will not be helped by this from the Italian statistics office this morning.

The composite leading indicator , updated to take into account the latest information, provided negative indications on the development of economic activity, having experienced in the last month the eighth consecutive decrease.

So slowing from not very much in the first place.

A Space Oddity

It was strange to see rumours of a change in ECB policy on the same day as this was announced by the International Monetary Fund (IMF).

To support growth in the near term, the central banks in advanced economies should maintain easy monetary policies, the IMF said.

Moving to the Euro area we got this.

Growth in the euro area declined to 1.2 percent at a seasonally adjusted annualized rate in the second quarter, after mild weather and consequent strong construction activity helped boost growth in the first quarter to 2.1 percent.

The background though was that growth of 2% was achieved in 2015 which would be followed by 1.7% this year and 1.5% next or in other words a slowing. Hardly a recipe for a less easy policy stance from an organisation which believes this sort of thing works.

Problems, Problems

An illustration of the problems caused by all these easy monetary policies and QE especially has come from the UK this morning. From the Financial Times.

Tesco’s  pension deficit has ballooned £3.2bn to £5.9bn as a result of lower bond yields. The increase is one of the most dramatic we have seen since the start of quantitative easing.

This shows how longer term business models are affected by what is happening and of course so far the UK has in the vast majority avoided any negative yields which destroy such business models. However allowing for costs one can be caught out as I discovered when getting a pension fund statement recently which showed I could expect it to be worth less than now when I retire. Only £56 but every little helps or rather not……

This principle applies in Europe and in places with negative yields even more so accordingly please take this below as something of a generic as the FT looks at Tesco.

The danger for Tesco and other mature businesses with defined benefit pension schemes is that sluggish economic growth, monetary stimulus and slim yields really are the new normal. If that problem was compounded by an equities rout, many companies would have to pay a lot more into their pension schemes.


The central planners are hitting trouble. Not only are events not working out to plan but they have in fact recently tightened their grip. For example the Bank of Japan is now targeting specific sections of the Japanese Government Bond yield curve. Yet we see confused examples of Open Mouth Operations from central bankers all over the shop and the ECB demonstrated that yesterday. No doubt one day it will adopt some sort of Taper but for now it is probably a confused attempt to stop bond yields falling further which is quite an irony as of course that is supposed to be the plan.

There are difficulties with the capital key or how it divides up its purchases between nations and no doubt some ECB members ( Weidmann of Germany) are unhappy. But as the central banks try to tighten their grip more is slipping through their fingers.







13 thoughts on “The operation of QE by central banks is getting ever more confused

    • Hi Forbin

      Perhaps the tiger thinks it has them by the tail. ..

      It is all something of a mess and I think that they are unsure what to do next, which usually means they will ease again. Meanwhile the oil price edges higher and does much of the job for them. Of course the awkward bit is that it makes only a few people better off and many more worse off.

  1. ‘The central planners are hitting trouble.’


    Plan A was to use debt to get ourselves out of a debt bubble.Plan A has mainly resulted in the Western world being even deeper in the debt hole than it was ten years ago.Made worse because Plan A has resulted in the productive parts of the economy being even more intrinsically linked to the property ponzi scheme and it’s over leveraged undercapitalized banks than it was before Plan A was implemented.

    Central banks are now hostages to fortune.You can’t admit that Plan A hasn’t worked,so the only way to keep up the illusion that you know what you’re doing is to double down on Plan A.

    Plan A to deal with problem A(debt bubble) has now resulted in problem B which is that many businesses are eyeing their pension deficits and pouring productive capacity ie capital into the hole.As businesses try to solve problem B they effectively undermine growth and force the CB’s to double down again on oh so failed Plan A.

    I remember a squaddie mate once eyeing a rather clanky engine which sounded like a washing machine with stones in.After a minute listening and looking over the engine like he was a mechanical engineer,he turned to me and said,
    ‘It’s f****d’
    A motto for our times.

    Shaun,as ever,thanks for your thoughtful pieces and your efforts to expose the inconsistencies and lies.Due to shift patterns,I’ve been missing the debate in the comments of late.

    Keep up the good work.

  2. Hi Shaun

    I found this article by Charles Goodhart quite interesting:–or-should-it-be-quite-erroneo/

    He seems to be saying that the use of QE to buy long term debt does not reduce interest rate exposure at all; the sight deposits created as a result are, effectively, quasi consols and do, overall, serve to reduce the maturity profile of government debt if they are regarded as such rather than increase it and, as such deposits are interest bearing, are fully exposed to rising short term interest rates so the interest rate “dividend” may be illusory.

    As you say, as the contortions get ever more complicated, so do the unintended consequences.

    • so that article confirms what we surmised here a while back

      QE is killing the pension industry to save the Banks

      and backing them all is the tax payer……

      and the criminals in the Banks are getting off scot free !

      isnt this underhand bail in ?


    • Hi Bob J

      Thanks for the link as back in the day a couple of the monetary policy textbooks i read were written by Charles Goodhart. However remembering some of his more recent writings something of a U-Turn seems to have taken place.

  3. in other news

    The financial industry could lose £38bn if the UK quits the single market, a report commissioned by a group lobbying on behalf of the City has said.

    The report, commissioned by TheCityUK, also said up to 75,000 jobs could go.

    This is codswallop

    We’ve already pumped 375Billion into this blackhole and more


    Ps : expect no CEO to be harmed in this exercise 😉

  4. Shaun,
    Latest Target2 figures showing capital flight from Italy Spain etc still continuing how long before Greek style controls needed?
    Meanwhile fees still accruing to US investment banks trying to raise capital for stricken Italian banks!

    • sometimes I wonder if the Brexit vote was rigged so we would leave

      ….. the euro imploding will make quite a mess , me thinks


  5. I’m wondering if the plan was to totally destroy the value of money alla Weimar, and debt with it.
    The failure of hyper-inflation to show up (so far) has TPTB wondering instead how we can move to Plan B (cashless society) without destroying the hidden wealth of the elite.

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