asset purchases

On top of the $265bn being made available to banks, the Bank of Japan has decided to double its asset purchase scheme to $122bn (¥10,000bn). The decision was made at the Bank’s scheduled monetary policy meeting, at which rates were kept at 0-0.1 per cent.

Of the $265bn (¥21,800bn) being made available to financial institutions, $182.3bn (¥15,000) is available immediately, and $82.6 (¥6,800) over the coming days.

Asset purchases
The Bank’s current Asset Purchase Programme is subject to a ceiling of $427bn (¥35,000bn). This splits into a maximum of $366bn (¥30,000bn) in loans, and a maximum of $61bn (¥5,000bn) stock of outstanding financial assets. It is this latter limit that is to be doubled to $122bn (¥10,000bn), effective today, with assets being bought by the end of June 2012.

Specific details are as follows: Read more

Maybe charity doesn’t pay, after all.

The founding assumption of my earlier post has proven incorrect, for which I apologise. To set the record straight, ECB national accounts show that the central bank held more like 18 per cent than 8 per cent of bonds bought to aid sovereigns in distress. Read more

And down they go again. A mere €146m ECB-bought bonds settled last week, following a bumper, €2.3bn, week the week before. As serious discussions began about enlarging the funds or the mandate of the EFSF, markets calmed and government bond yields fell, requiring less intervention from the ECB. Relatively speaking, however, bond yields remain high.

One idea floated at the discussions is that the EFSF will be allowed to lend money to sovereigns to buy back their own debt.

An ECB council member has pointed out the possibility of bond-buying duties shifting entirely to Europe’s rescue fund. “That would be one way to have additional flexibility that at times might be found useful,” Cyprus’ central bank governor Athanasios Orphanides told Bloomberg. Senior French officials say they back the plan, though Germany – the fund’s biggest contributor – remains reluctant.

The six AAA-rated euro member states are apparently meeting to discuss the rescue fund in advance of a wider eurozone finance ministers meeting this afternoon. As well as changing the fund’s mandate to allow the purchase of bonds, one change under consideration is simply to increase the reserves at the fund’s disposal. But Austria’s finance minister has called instead for efficiency improvement and sees no “acute” need for an enlargement, while Slovakia’s PM would prefer an increase in the ECB‘s capital, saying such a move would be “more systematic”.

The EFSF can call upon €440bn at present – a sum inspiring “shock and awe” initially, but now considered “too small“. But in practice only about €250bn could be drawn down without risking a downgrade to debt issued by the facility. One way to tackle this, as FT Alphaville pointed out today, would be to accept a downgrade for the fund’s debt. That way, all €440bn could be used. Alternatively, the EFSF could issue tranches – debt with different ratings. Read more

After reaching a modest Ireland-crisis-high of €2.7bn last week, the ECB’s bond purchases have fallen sharply to €603m. With the cost of debt in Spain and Greece again reaching record highs, is this sort of quantity enough?

Many will say not, especially after bond purchases during the Irish bail-out were revealed last week to be just €2.7bn. What with the bail-out panic and the ECB quadrupling the minimum bond purchase size from €25m to €100m, most had expected a far larger increase in the central bank’s shopping bill. Of course, bearish markets can be subdued with large rumours instead of large purchases – but it’s not a strategy that can work for long.

Liquidity measures are given their own paragraph in today’s monetary policy announcement from the Reserve Bank of India, as tempering inflation allowed the central bank to hold rates. The (temporary) end to the Bank’s rate normalisation programme was expected after the governor gave a strong hint last month.

“The extent of [liquidity] tightness has been beyond the comfort level of the Reserve Bank,” said the statement, which announced two liquidity injection measures. There has been a cash crunch in the banking sector since at least early November, when the RBI extended temporary easing measures.

The first measure, which has been used temporarily before, is to reduce the amount banks have to keep with the central bank. The statutory liquidity ratio will be permanently reduced from 25 to 24 per cent with effect from December 18. The last time this was done, one estimate equated the reduction to an additional 45,000 crore Rs ($10bn) liquidity.

The second measure Read more

The ECB’s controversial bond buying programme continues to increase, in spite of vocal opposition from high profile figures such as Axel Weber. Last week, €2.7bn eurozone bonds settled – thought to be almost entirely government debt of struggling economies such as Ireland and Portugal.

Perhaps surprisingly, the figure rose following the Ireland bail-out: last week, €2bn settled. The number remains modest compared to the start of the programme, during the Greek crisis, when in one week €16bn bonds were bought. Read more

European officials are considering measures to overhaul the eurozone’s €440bn rescue fund, including using it to buy bonds of distressed governments, say people involved in the deliberations. The changes would make it easier to aid debt-burdened economies without resorting to fully fledged bail-outs.

Buying bonds of distressed countries to lower their borrowing costs is currently only being employed by the European Central Bank, a policy that has proved controversial. Read more

Both the Federal Reserve and the ECB are now purchasing government debt in large scale. Yet neither of them seem at all eager to admit that they are doing anything unconventional with their monetary policy. In fact, some of the recent statements by both Ben Bernanke and Jean-Claude Trichet are not as straightforward and transparent as they might have been.

In the US, this is probably because of the risk that Congress might actually intervene to stop the Fed from “printing money”. Therefore the Fed has started to make narrow technical arguments which obfuscate what it is really doing. In Europe, the ECB has a strong historical dislike of monetising government deficits, and fears that quantitative easing might be declared contrary to their legal obligations. Therefore they draw very fine distinctions between their actions and US-style QE. In the long run I think that both central banks would be better advised to tell it exactly as it is.

Mr Bernanke has recently claimed that the Fed’s current policy should not be described as “quantitative easing”, a claim I disputed in this earlier post. Over the weekend, he defended the Fed on the grounds that the central bank was not printing money, which has been the accusation levelled at him by many of his Republican critics. Is Mr Bernanke’s claim accurate? Read more

European Central Bank action to calm tensions in eurozone bond markets must remain firmly controlled, otherwise the euro’s monetary guardian risks “losing everything we have”, one of its most ­senior policymakers has warned.

Mario Draghi, Italy’s central bank governor, says in an interview with the Financial Times that large-scale purchases of government bonds could threaten the ECB’s freedom to act without political interference and break European Union rules. Read more

The Fed is buying more bonds; the ECB might even be considering it. But Hungary is throwing in the towel on its bond-buying programme, saying the plan has not made “significant progress” in easing long-term forint funding conditions for banks.

Hungary’s central bank introduced the bond-buying programme on February 8, 2010, intending to buy up to HUF 100bn to the end of this year. Purchases in the secondary market went broadly as planned, with HUF 30bn of nominal value bought and mortgage-government bond spreads declining from 150–200 basis points in 2009 to 80–150bp now. Purchases in the primary market, however, were “much smaller than expected”, at about HUF 7bn. Read more

ECB support for struggling sovereigns is at its highest since July. Data just released show that €1,965m bonds bought by the European Central Bank settled last week.

This number is expected to continue to rise. The FT reported on Thursday that the ECB was buying Portuguese and Irish bonds in €100m tranches, four times the previous clip size.

It is good news that the New York Fed is engaged in a campaign to get key staffers to finally think about asset prices.The Alan Greenspan mantra that the market is always right has – mercifully – been cast aside… Still, there is one sphere where the central banks are unlikely to sound the alarm.

In both Japan and the US, sovereign debt trades at ever lower yields as a result of purchases of government bonds by the central banks themselves… [T]he largest part of the buying comes from the central banks themselves. With massive purchases of Treasuries, the distinction between fiscal policy and monetary policy is becoming blurred. Central banks become ever more complicit in politics… Read more

James Politi

The Federal Reserve has just released minutes from its September 21 meeting, and it does seem that the path towards a new round of quantitative easing, starting as early as November, is set.

Although there are still a few hold-outs who believe the threshold for action should be higher and involve further deterioration in the economy, Ben Bernanke, Fed chairman, seems to have forged a consensus along the belief that conditions are already bad enough to warrant more monetary stimulus.

Arguably the most interesting segment of the minutes came when officials began reviewing the benefits and costs of additional easing, and the “best means to calibrate and implement such [asset] purchases”. Read more

Robin Harding

Richard Fisher, the president of the Dallas Fed, tells off the markets and the media in a speech today for being presumptuous about what the Fed has decided.

“I am afraid that despite recent speculation in the press and among market pundits, we did little to settle the debate as to whether the Committee might actually engage in further monetary accommodation, or what has become known in the parlance of Wall Street as “QE2,” a second round of quantitative easing. It would be marked by an expansion of our balance sheet beyond its current footings of $2.3 trillion through the purchase of additional Treasuries or other securities. To be sure, some in the marketplace―including those with the most to gain financially―read the tea leaves of the statement as indicating a bias toward further asset purchases, executed either in small increments or in a “shock-and-awe” format entailing large buy-ins, leaving open only the question of when.”

I’m one of the naughty boys in the media. But Mr Fisher has been a bit naughty, too, because he shouldn’t be telling us about the last FOMC meeting before publication of the minutes. Read more

ECB bond purchases have moderated again, down to €134m last week from €323m the week before. This is well within tolerance, as the chart shows. So while there may be renewed concerns over the eurozone periphery, the central bank’s covered bond purchases do not yet hint at structural support.

Related post: ECB bond purchases are noise (Sep 14)

The ECB has stepped up its purchases of securities, but viewed in context it’s small fry. Last week, €237m was spent on “securities held for monetary purposes”; the week before it was €173m; the week prior, €142m. (They are the three barely discernible rightmost blue boxes on the chart.)

Confining ourselves to this three-week ‘trend’ is misleading, however. Low level purchases fluctuate. Four weeks ago, €337m were bought. Read more

James Politi

In late July, James Bullard, president of the Federal Reserve Bank of Saint Louis, gave a speech which for all intents and purposes signalled that the central bank was contemplating a tilt towards easier monetary policy. Usually known for being an inflation hawk, Mr Bullard raised that Japan-style deflation could unfold in the US, and said quantitative easing might be an appropriate response.

Well, Mr Bullard was back in action today, and at a presentation in his district – Rogers, Arkansas was the location – he argued that if the economy worsens, additional asset purchases (beyond the reinvestments of proceeds from expiring mortgage-backed securities that were agreed on August 10 by the Fed) might be necessary. Read more

James Politi

Goldman Sachs economists have been among the more bearish forecasters on Wall Street, seeing an incredibly sluggish recovery with inflation falling close to zero and unemployment hovering around 10 per cent through the end of next year.

So last night, they released a 32-page paper taking their view to its most logical conclusion. If they ran the Federal Reserve, they might well be contemplating further policy accommodation. “In the short term our model combined with GS economic projections implies that further macroeconomic easing would be optimal to counter stubbornly high unemployment and falling inflation. With the funds rate already at zero bound, additional stimulus would need to come through fiscal easing and/or renewed asset purchases.”

The GS paper goes on to say, to no great surprise, that if the additional easing is carried out on the fiscal side, “it should be paired with legislation that brings the federal budget back onto a sustainable path via a combination of spending cuts and tax increases.”

Instead, if the focus is on asset purchases, GS warns that the Fed would have to be “realistic” about the outcome, since there is a potential problem of diminishing returns. Read more

Krishna Guha

The Fed’s forecast will have to shift a lot to get it into an early tightening mode, says Krishna Guha of the Financial Times Read more