Commentary: Central banks and bond buying
Central banks have routinely bought and sold securities as part of their market operations, but the present scale of their involvement is unprecedented. Since the global financial crisis zero rates have become ubiquitous in the US and Europe; expanding balance sheet through asset purchases to support the economy has become widespread. The US Federal Reserve has been the most influential in global markets, with its holding of treasuries, as a share of total outstanding, up from less than 14% at end-2019 to close to 24% presently, an extraordinary jump. These measures have helped stabilise markets, avoided a liquidity crunch, backstopped sentiments, and countered deflationary risks.
What are the downsides going forward? Central banks’ balance sheets, bloated with government securities, run the risk of substantial capital losses if interest rates begin to rise. Market signals about bond pricing is distorted owing to the oversized role played by monetary authorities. Central banks can also become paralysed from acting owing to the fear of market and political repercussions if they were to sell the bonds. The exit or end-game looks rather tenuous.
The jump in central bank holding of government securities has spread to other developed markets and emerging economies as well. Since 2015, Bank of Japan’s holding for JGBs has gone from 13% to 45%, perhaps not surprising given the rollout of its Quantitative and Qualitative Monetary Easing programme, but there are many others with striking accumulations as well. From Indonesia and Philippines to Australia and the UK, central banks have pushed up their holding of government securities by several times. Singapore, South Korea, and Thailand make up the exceptions.
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at [email protected] for matters arising from, or in connection with the report.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-878-9999. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.