Central Banks now own a third of the entire $54 trillion global bond market

http://www.zerohedge.com/news/2017-06-04/central-banks-now-own-third-entire-54-trillion-global-bond-market

Two weeks ago we asked a question: maybe behind all the rhetoric and constant (ab)use of sophisticated terms like “gamma”, “vega”, CTAs, risk-parity, vol-neutral, central bank vol-suppression, (inverse) VIX ETFs and so forth to explain why despite the surging political uncertainty in recent years, and especially since the US election…

… global equity volatility, both implied and realized, has tumbled to record lows, sliding below levels not even seen before the 2008 financial crisis, there was a far simpler reason for the plunge in vol: trading was slowly grinding to a halt.

That’s what Goldman Sachs found when looking at 13F filings in Q1, when it emerged that the gross portfolio turnover of hedge funds had retreated to a record low of just 28%. In other words, few if any of the “smart money” was actually trading in size.

Over the weekend, JPM confirmed as much observing that, among other things, it was the retrenchment of active managers, who are being crowded out by central bank QE in the bond space and a shift towards ETFs in the equity space, that acts as long-term depressant of market volatility.

As the bank notes, since the Lehman crisis, the propensity to change positions or trade has declined as active managers have been crowded out by central bank QE, coupled with FX reserve managers’ and commercial banks’ purchases of bonds, all of which are crowding out active bond managers. This crowding out is illustrated in Figure 10 by the ownership of the $54tr universe of tradable bonds globally. 50% of this universe is owned by banks, central banks or commercial banks both of which are rather passive owners of bonds.

While the point is critical, what we would like to highlight in the chart below is the staggering amount of debt instruments owned by central banks: as of the latest data, central banks own just over a third of the global tradable bond universe of $54 trillion, or roughly $18 trillion. How this amount of debt on bank balance sheets is ever unwound, i.e. sold – even with central banks’ best intentions  – without crashing the bond market, we don’t know.

———-

thats a large part of pie to be sitting in one kitchen spread over many rooms..

“This crowding out is illustrated in Figure 10 by the ownership of the $54tr universe of tradable bonds globally. 50% of this universe is owned by banks, central banks or commercial banks both of which are rather passive owners of bonds.”

its a hot pie too..dont get caught holding it..

401

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~ by seeker401 on August 17, 2017.

9 Responses to “Central Banks now own a third of the entire $54 trillion global bond market”

  1. Look at the power of the Bond market:

    1-“Bondholders also enjoy a measure of legal protection: under the law of most countries, if a company goes bankrupt, its bondholders will often receive some money back (the recovery amount), whereas the company’s equity stock often ends up valueless.”

    2-“Being a creditor, bondholders have priority over stockholders. This means they will be repaid in advance of stockholders, but will rank behind secured creditors in the event of bankruptcy.”

    https://en.wikipedia.org/wiki/Bond_%28finance%29#Bond_valuation

    Banks owning bonds, it seems, always gain money and are parasites on businesses. Since there is money in the market, then owning bonds sucks the money dry and is low risk for banks. The more bonds in the market in the better off the central banks.

    If the borrower can not pay back the loan, the bank still wins by getting returns before the stockholders of the failed/bankrupt business. The more a bank has its’ hands in the market, then failures in the market will not hurt the bank as long as money is in the market giving returns through other loans (from borrowers) and through bankruptcy (again from borrowers) the bank ends up with the money.

    I may be simplistic in my understanding, but central banks who have the largest hand in the market, including other banks are borrowers of them, it appears central banks benefit from owning most of the bond market. Less likely they will fail. No wonder borrowing is pushed and encouraged, which on the business side may appear volatile, but on the central bank side it only makes them more stable.

    Of course it may turn out that a business will have to borrow to buy a bag of rice for a million dollars, but the central bank will not fail in such a market situation it appears.

    Might I be missing something?

    • If the borrower can not pay back the loan, the bank still wins by getting returns before the stockholders of the failed/bankrupt business. The more a bank has its’ hands in the market, then failures in the market will not hurt the bank as long as money is in the market giving returns through other loans (from borrowers) and through bankruptcy (again from borrowers) the bank ends up with the money.

      bingo

  2. the central banks are also huge holders of stocks.

    whoever owns the central banks – and it’s unclear to me who that actually is – is going to end up owning the world, either through direct ownership or by being owed more than can ever be paid.

    we watched it happen in our lifetimes!

    • The stock fund and bond fund (which are sectors of Mutual funds) in the U.S. alone are 78% of the Mutual fund market. Mutual funds are another layer of buying and selling on top of the existing buying and selling of stocks and bonds. From what I understand, which I may be wrong, bonds, for example, are bought and sold and a bond fund is able to buy and sell as a “bond fund” (or Mutual fund) in accord with the already pre-existing bonds. So the more bonds, then the more bond funds that are able to be bought and sold on the market. So whoever owns a lot of bonds – the central banks – are creating a larger amount of bonds so the bond fund market is able to be larger.

      – “At the end of 2016, mutual fund assets worldwide were $40.4 trillion, according to the Investment Company Institute.”
      – “United States: $18.9 trillion”
      – “In the United States at the end of 2016, assets in bond funds were $4.1 trillion, representing 22% of the industry.”
      – “In the United States at the end of 2016, assets in Stock funds were $10.6 trillion, representing 56% of the industry.”
      https://en.wikipedia.org/wiki/Mutual_fund

      Who owns Mutual funds?
      “Although mutual funds are usually initiated and often indirectly managed by investment companies, shareholders own the funds .”
      http://www.answers.com/Q/Who_owns_mutual_funds

      Who are shareholders?
      “In the aftermath of the great financial crisis of 2008, global central banks began to buy stocks, bonds and other financial assets in very large quantities and they haven’t stopped since.  In fact, as you will see below, global central banks are on pace to buy 3.6 trillion dollars worth of stocks and bonds this year alone.  At this point, the Swiss National Bank owns more publicly-traded shares of Facebook than Mark Zuckerberg does, and the Bank of Japan is now a top-five owner in 81 different large Japanese firms.”
      http://thedailycoin.org/2017/06/08/central-banks-now-stocks-bonds-worth-trillions-crash-markets-selling/
      —-
      This is why I think stock markets will keep going up. Does this have to do with your deflation model xxx? Cause it seems as inflation pressure increases, then the buying up by central banks of stocks, bonds, mutual fund expansion, etc (let us not forget hedge funds which are another huge market) increases inflation pressure, but the continual buying at the same time drives the inflation pressure into the central banks more than the rest of the market, because the central banks are owning most of the money through the stocks, bonds, etc. They drive the inflation up in their buying, but they drive the inflation up in their portfolio, or domain (they receive and experience most of the inflation). This increased experience of inflation in the central banks for solvency sake drives the central banks to buy more of the market so that the central bank experiences the inflation and not the rest of the market.

      It seems new markets create lasting or enduring stock risings. The new markets are not essentially geographic, except for wars and high tech expansions which are actual product demands. The new markets now-a-days are increasingly in the digital sphere such as the cloud and cryptocurrency. These are real spaces. Just like when a new store opens in a neighborhood there needs to be space to build the store and a market to grow economically. The cloud creates space which means more market interaction; whatever is being transacted in the cloud, or whatever the cloud offers to the consumer. This newly provided space comes at a cost, and it is a new market.

      Security threats increase the demand for new markets as security agencies, in the cloud or on the internet (just like wars between nations) will fill the need.

      Banks will pump out more money for more monetary transaction flows, which all these new markets increased the need for more money as more exchanges are taking place because there are more markets. So with more markets, more money is exchanged, and there is a need for more money to make those increased exchanges. It does not have to be an increased amount of money. It could be an increased value of the money instead (think gold based dollar). Yet, this is a survey of today’s economy, and central banks get involved in the market in the first place by printing out money which transfer into the market through loans and also by central banks buying up the market through stocks and bonds, etc. If money was not printed, then central banks would not have anything to buy up the market.

      On top of these expanding markets are new stocks and bonds, which means new Mutual funds, and the cycle increases, meaning the numbers only grow larger, and as xxx said, the central banks increasingly own everything.

      • The dailycoin article I linked above is informative:

        “Have you ever wondered why shares of Apple just seem to keep going up and up and up?
        Well, the Swiss National Bank bought almost 4 million shares of Apple during the months of January, February and March [2017].”

      • dailycoin, “Switzerland’s central bank now owns more publicly-traded shares in Facebook than Mark Zuckerberg, part of a mushrooming stock portfolio that is likely to grow yet further.
        The tech giant’s founder and CEO has other ways to control his company: Zuckerberg holds most of his stake in a different class of stock. Nevertheless this example illustrates how the Swiss National Bank has become a multi-billion-dollar equity investor due to its campaign to hold down the Swiss franc.”

        Bank prints out money, loans money, buys and sells bonds, the dollar (or franc) inflates, so the bank buys up the increased inflation in the market by buying more, e.g. stocks. As the inflation increases, the buying up by banks increases. The banks experience the thrust of the inflation because they keep buying it up as the inflation expands. Numbers grow larger, banks own more – perpetually.

        No wonder new markets, like BitCohen open up. I do not doubt banks make new markets so they have a market to buy into, because if they keep buying into markets, then eventually they own all the market. Yet if they create markets, or expand current markets, then there is still a market for the banks to buy. Wars, the cloud, cryptocurrency, the thought of building on the moon and mars are created markets, if people buy into the idea, also (whether in increased stock investments in the companies, e.g. Amazon or SpaceX, or scientific experiments to build the space rockets, etc. and the cycle continues) – new markets.

        • “Switzerland’s central bank now owns more publicly-traded shares in Facebook than Mark Zuckerberg, part of a mushrooming stock portfolio that is likely to grow yet further.

    • ownership would have to go back to the “big family’s”..

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