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Market | Global Market

Global Quantitative Tightening Will Be USD2trn Over Next Two Years

Feb 26, 2023   •   by   •   Source: Fitch Ratings   •   eye-icon 176 views

Combined asset purchases of the Federal Reserve, the ECB, the Bank of England (BOE) and the Bank of Japan (BOJ) will be negative to the tune of USD1 trillion in both 2023 and 2024 in a massive swing in the flow of central bank liquidity, Fitch Ratings says in a new report.
 
This large-scale global quantitative tightening (QT) will be a striking contrast to 2022, when ECB and BOJ purchases outweighed – in absolute terms – the decline in Fed and BOE quantitative easing (QE) asset holdings. Last year saw another USD500 billion of global QE, following USD5 trillion in 2020 and USD3 trillion in 2021.
 
QT will raise the supply of government bonds that markets must absorb, at a time when new government borrowing is still large. US bond markets will need to take on an extra USD2.1 trillion of securities in the financial year to end-September 2023 given the projected USD1.4 trillion fiscal deficit and a reduction in Fed US Treasuries (UST) holdings of around USD700 billion.
 
 The shock to eurozone government bond supply will be even more dramatic. Eurozone government borrowing has, in aggregate, been smaller than ECB bond purchases in most years since 2015, resulting in a decline in market holdings. But in 2023 the market will need to increase holdings by around EUR650 billion.
 
QT could test the resilience of bond market functioning, which was distorted by QE. There are indications that market depth and liquidity in the UST market is lower than in the past. The ‘dash for cash’ episode in March 2020 highlighted the role of selling by mutual funds and leveraged investors. Turnover rates have fallen and primary dealers’ capacity to step up intermediation in times of market pressure has been reduced. The recent UK gilts crisis also revealed risks to smooth bond market functioning from leveraged investors.

 

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