The largest classes of QE assets, which have disappeared or are circulating:
Repos: BoC repos 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 of them were gone. There is now just C$400 million left, waiting to mature (green line in the chart below). Canadian Treasury Bills: Short-term Canadian Treasury bills that 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 when they matured. In March 2021, he announced that he would let them and repos go to zero, citing “moral hazard” as the reason. By September 2021, the T-bills were mostly gone. By April 2022, they were completely gone and are still gone today (purple line). MBS: The BoC never bought many of these “mortgage bonds” in the first place. They peaked at just under C$10 billion at the end of 2020. In October 2020, the BoC said it would end its purchase of MBS altogether, citing concerns about the Canadian housing bubble. They have since declined due to rollover capital payments and remain a very small component, at C$9 billion (yellow line). Government of Canada (GoC) Bonds: This is the big, main QE tool. In October 2020, the BoC announced that it would reduce GoC bond purchases from C$5 billion a week to C$4 billion a week – but don’t call it “tapering,” he said at the time, although it was clear- old taper. In April 2021, when it held 40% of outstanding GoC bonds, it reduced GoC bond purchases to C$3 billion, citing “indications of erratic expectations and speculative behavior” 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 on the rise, it announced it would end GoC bond purchases altogether, starting November 1, 2021, and allow maturing bonds to arrive without replacement. There are no “caps” on unrolling GoC bonds. What ripens, flows. The surprise announcement sent yields soaring. This was the beginning of its official QT, although its total assets had already declined considerably because the repos and Treasuries were mostly gone. GoC bonds from the BoC peaked at the end of December 2021 at C$435 billion, and in the eight months since have fallen 12.6%, or $54 billion, to C$381 billion (red line).
“Indemnity:” Losses on its securities.
Note the brown line on the chart above – now the second largest asset, “Compensation”. This is the estimated value of the compensation agreements between the Federal Government and the BoC. It represents the estimated losses on the securities held by the BoC if it were to sell them at current prices, which it would then be reimbursed by the federal government. As part of this QE frenzy that began in March 2020, the federal government agreed to compensate the BoC for any real losses on its bond portfolio. Those losses were expected to pile up when bond yields start rising, as they have since early 2021. The Bank determines the loss estimate as an asset on this balance sheet. If TTE is actually paid by the state for these losses, the amount is reduced by the compensation. This account is a form of claim owed by the federal government to the Treasury for bond losses. When returns increase, these losses increase. When yields fall, losses fall (all bondholders experience this). During the summer bear market rally that lasted in Canada, as well as the US, 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, while estimated losses have risen again. The chart below shows the details of these estimated damages, based on the estimated damages. Those charges peaked in the June 15 balance sheet at C$35 billion. Then, as yields fell and losses narrowed, the value of claims also fell, reaching C$26 billion in the Aug. 10 balance sheet. Then they took off again. In the Aug. 24 balance sheet, released Friday, they jumped back to C$31 billion: Do you enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally understand why – but do you want to support the site? You can donate. I appreciate it immensely. Click on the mug of beer and iced tea to learn how: Would you like to be notified by email when WOLF STREET publishes a new article? Register here.
