Decade of QE leaves big central banks owning fifth of public debt

Leading central banks own a fifth of their governments’ total debt, a sign of the scale of the challenge they face in unwinding unprecedented stimulus measures deployed in the past decade.

Since the financial crisis, the big central banks have carried out large scale purchases of bonds and other securities in a bid to boost the global economy by driving down borrowing costs.

In total, the six central banks which have used quantitative easing - the US Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England, along with the Swiss and Swedish central banks - now hold more than $15tn of assets, according to analysis by the FT of IMF and central bank figures. The scale is more than four times the pre-crisis level.

Of this, more than $9tn is government bonds - one dollar in every five of the $46tn total outstanding debt owed by their governments.

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The ECB’s total balance sheet recently topped that of the Fed in dollar terms. It now holds $4.9tn of assets, including nearly $2tn in eurozone government bonds. The BoJ’s balance sheet has also just topped the Fed’s $4.47tn, with $4.53tn of holdings, of which 85 per cent are Japanese government securities.

The Fed’s balance sheet has expanded significantly several times in the past, including during the second world war when it soaked up debt sales in a bid to improve market conditions.

But the current era is the first time in history that such a large group of central banks has undertaken such a substantial volume of co-ordinated buying over the space of nearly a decade.

What was intended as a temporary emergency measure has evolved into a significant challenge for policymakers as they contemplate how to return to normal monetary conditions.

With the world's leading monetary policymakers preparing for their annual global gathering at Jackson Hole next week, markets are closely watching Mario Draghi, ECB president, for any indication that he is preparing to withdraw the euro zone's $2tn bond-buying programme.

David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, the Washington-based think-tank, said policymakers were approaching the process of withdrawing stimulus "with great care and trepidation", after their fingers were burnt by the 2013 " taper tantrum" when markets reacted violently to signals that the Fed was about to start scaling back its bond purchases.

Jackson Hole will be an important moment for markets if “Draghi or [Fed governor Janet] Yellen want to use it to send a message” about monetary policy, Mr Wessel said.

Richard Turnill, global chief investment strategist at the world's largest asset manager BlackRock, said that "barring unforeseen crises, we have seen the low in bond yields and the end of a 35-year bull market in bonds".

- (Copyright The Financial Times Limited 2017)