The "Great Accumulation" Is Over: The Biggest Risk Facing The World's Central Banks Has Arrived

Tyler Durden's picture

To be sure, there’s been no shortage of media coverage regarding the collapse in crude prices that’s unfolded over the course of the past year. Similarly, it’s no secret that commodity prices in general are sitting near their lowest levels of the 21st century. 

When Saudi Arabia, in an effort to bankrupt the US shale space and tighten the screws on a recalcitrant Moscow, endeavored late last year to keep oil prices suppressed, the kingdom killed the petrodollar, a move we argued would put pressure on USD assets and suck hundreds of billions in liquidity from global markets. 

Thanks to the fanfare surrounding China’s stepped up UST liquidation in support of the yuan, the world is beginning to understand what we meant. The accumulation of USD assets held as FX reserves across the emerging world served as a source of liquidity and kept a bid under things like US Treasurys. Now that commodity prices have fallen off a cliff thanks to lackluster global demand and trade, the accumulation of those assets slowed, and as a looming Fed hike along with fears about the stability of commodity currencies conspired to put pressure on EM FX, the great EM reserve accumulation reversed itself. This is the environment into which China is now dumping its own reserves and indeed, the PBoC’s rapid liquidation of USTs over the past two weeks has added fuel to the fire and effectively boxed the Fed in.

On Tuesday, Deutsche Bank is out extending their "quantitative tightening" (QT) analysis with a look at what’s ahead now that the so-called "Great Accumulation" is over. 

"Following two decades of unremitting growth, we expect global central bank reserves to at best stabilize but more likely to continue to decline in coming years," DB begins, before noting what we outlined above, namely that the "three cyclical drivers point[ing] to further reserve draw-downs in the short term [are] China’s economic slowdown, impending US monetary tightening, and the collapse in the oil price."

In an attempt to quantify the effect of China’s reserve liquidation, we’ve quoted Citi, who, after reviewing the extant literature noted that for every $500 billion in EM FX reserve draw downs, the effect is to put around 108 bps of upward pressure on 10Y UST yields. Applying that to the possibility that China will have to sell up to $1.1 trillion in assets to offset the unwind of the great RMB carry and you end up, theoretically, with over 200 bps of upward pressure on yields, which would of course pressure the US economy and force the Fed, to whatever degree they might have tightened by the time China’s 365-day liquidation sale ends, to reverse course quickly. 

Deutsche Bank comes to similar conclusions. To wit:

The implications of our conclusions are profound. Central banks have accumulated 10 trillion USD of assets since the start of the century, heavily concentrated in global fixed income. Less reserve accumulation should put secular upward pressure on both global fixed income yields and the USD. Many studies have found that reserve buying has reduced both bund and US treasury yields by more than 100bps. For every $100bn (exogenous) reduction in global reserves, we estimate EUR/USD will weaken by ~3 big figures.




Declining FX reserves should place upward pressure on developed market yields given that the bulk of reserves are allocated to fixed income. A recent working paper by ECB staff shows that the increase in foreign holdings of euro area bonds from 2000 to mid-2006... is associated with a reduction of euro area long-term interest rates by about 1.55 percentage points, in line with the estimated impact on US Treasury yields by other studies. On the short-term impact, one recent paper estimates that “if foreign official inflows into U.S. Treasuries were to decrease in a given month by $100 billion, 5- year Treasury rates would rise by about 40–60 basis points in the short run”, consistent with our estimates above. China and oil exporting countries played an important role in these flows.


Which of course means the Fed is stuck:

The current secular shift in reserve manager behavior represents the equivalent to Quantitative Tightening, or QT. This force is likely to be a persistent headwind towards developed market central banks’ exit from unconventional policy in coming years, representing an additional source of uncertainty in the global economy. The path to “normalization” will likely remain slow and fraught with difficulty.

Put simply, raising rates now would be to tighten into a tightening.

That is, the liquidation of EM FX reserves is QE in reverse. The end of the great EM FX reserve accumulation means QT is set to proliferate in the face of stubbornly low commodity prices and decelerating Chinese growth. And indeed, if the slowdown in global demand and trade turns out to be structural and endemic rather than cyclical, the pressure on EM could continue unabated for years to come. The bottom line is this: if the Fed hikes into QT, it will exacerbate capital outflows from EM, which will intensify reserve draw downs, necessitating a quick (and likely embarrassing) reversal of Fed policy and perhaps even QE4.

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Tom Servo's picture

Now eat that shit sandwich, Mr. Yellen!  It's kosher!

bania's picture

When you're this big they call you "Mister"!

Robert Paulson's picture

He's a handsome fella, isn't he?

Ham-bone's picture

There is no path to normalization...just consider the Fed's "plan" to raise's to pay banks billions moar IOER's...$2.5 trillion in excess incent them not to lend and maintain QE while doing it???  If anybody wonders why the Fed wants to raise rates...follow the money!!!

SWRichmond's picture

"Following two decades of unremitting growth, we expect global central bank reserves to at best stabilize but more likely to continue to decline in coming years,"

It wasn't was a debt bubble.

BTW, it loooks to me like "they" are "allowing" an "orderly" market decline today.

TSA Thug's picture

I've got a stash of about $60,000 that I got from selling on ebay contaban that passengers "left" at the checkpoints. I'm going to sell those 10Y like crazy.

This is one of those ZH stories to take action on.

Oh regional Indian's picture

Hah @ TSAThuggie...

Meanwhile, I'm REALLY CERTAIN that putting Yelling in THE chair is a big FUCK YOU to everyone...look, we can put this touchy, vapid, un-inspiring, un-inspired, formless pant suit and there is nuttin you can do about it...


Latest on the music front...if fusion is your thing...


Mr. Chairwoman's picture

We are not going to raise rates if we think it is going to tip the economy into a recession.

We will raise rates because we believe the economy is strong enough that it is appropriate to have higher rates to meet the objectives that have been assigned by Congress.


bob_stl's picture

...but we're independent!

hardy har har!

WordSmith2013's picture

The Writing’s On The Wall


Yellen knows exactly what is going to happen this month,
just like Bernanke did in 2008 and Greenspan did in 2001.

NoDebt's picture

Not to point out the elephant in the room, but the 10 year is down a couple bps today (i.e. it's price has gone up) and still riding in the same channel it has been for months.  Maybe the blow-out in UST rates from China's dumping is yet to come?

They could dump another 100 Billion tomorrow morning and I don't think that would move the rate on the 10 year more than a couple of bps.

Said another way, if QE isn't what drove interest rates into the shitter to begin with (and it's not) why would anyone think that QT is what's going to shoot them to the moon?

If China is selling, somebody, somewhere is buying (the biggest buyer probably being withing the Marriner-Ecles building).  These things don't just poof off the planet because China sold them.  If only debt was that easy to be rid of.

SickDollar's picture

I honestly never understood why Yellen took the job, she knew things were fuck up and they are worst now lol

To tell you the truth , she is indeed  the prefect candidate to take the fall/blame



SeattleBruce's picture

"If only debt was that easy to be rid of."

If only money grew on trees for us too!

OldPhart's picture

Umm, what did they buy them with?  It couldn't have been dollars.


OldPhart's picture

Nice link.

I guess few actually watched or took it to heart.

Professor Fate's picture

So as "Smellin" Yellin is about to find out, if you're trying to pick up a turd, there is simply no clean end.

Fate the Magnificent
"Push the Button, Max" 

newdoobie's picture

Turds are like women, the older they are the easier they are to pick up!

FreedomGuy's picture

This article makes a good point, though. If not enough bids come in to finance the debt that puts bonds in a squeeze play. Raise rates and wreck the economy but attract more foreign money. Maintain or lower rates and not enough purchases.

My bet is the Fed maintains, lowers if they are scared and then soaks up the extra bonds if they have to...until they own the entire national debt, if necessary. 

Bastiat's picture

$60K?  That's a lot of toenail clippers and swiss army knives.

RopeADope's picture

Shakedowns of Chinese white collar criminals can be profitable.

Professorlocknload's picture

But think of the tens of thousands of air disasters it prevented.

jerry_theking_lawler's picture

Year after 9/11, flew out of Nashville. My carryon bag had a set of nail clippers unknown to me. No problems in Nashville. On the way home from Ohara, I was strip searched by an angry indian guy after he asked me if I had anything in my bag. I said no and when it came back on X-ray, there was almost a fight....over a set of small finger nail clippers. World. Gone. Mad.

Oh yeah, my story is that I tried to find a good nail clipper company to invest in due to all of the seizures at the airport. I bought some WorldCom instead....

TheFutureReset's picture

The "growth" as quoted is in central bank reserves, not economic growth. So you agree with the quote. 

Geronimo66's picture

Leave today out but the rest is spot on.

KnuckleDragger-X's picture

Cause and effect, who knew? I expect whatever the best thing to do is, they will do the opposite, so prepare for a wild ride......

SimplePrinciple's picture

Talk about mixing up cause and effect, take a look at this tidbit from the DB so-called analyst:

"Less reserve accumulation should put secular upward pressure on both global fixed income yields and the USD."  

So, let me get this straight, CBs don't want to hold so many dollars.  That makes .gov pay more for the money it borrows. Okay, but having to pay more to get somebody to bid on your paper does NOT make your paper more valuable.  It does NOT strengthen the dollar.

conscious being's picture

Rising rates put a bid under the dollar.

SimplePrinciple's picture

Get a job at DB.  Let me put it another way.  If you have to cut your price in order to sell more of your product (USTs), that does not mean that demand for your product has increased (USDs).

Payne's picture

What if the path to Normalization is getting the US out of reserve currency status ?  They cannot just withdraw !  They need to force the World to reject the $ as the Worlds Reserve Currency, then the Financial Masters are free to inflate the currency.

Zirpedge's picture

RP...looks like Jimmy Saville on the recieving end of a left cross from a limp wristed San Francisco liberal.

Winston Churchill's picture

Bad confirmation, and you need to check its teeth.

Knacker fodder IMO.

Stumpy4516's picture

One of the biggest stories about the ME in a long time was posted yesterday on ZH.  Russia was moving into Syria.  Read that threads comments closely.

Today RT has reported this on their website:

"No Russian jets were deployed to Syria in order to launch attacks against Islamic State militants (IS, formerly ISIS, ISIL) and Syrian rebels, a military source told RT, dismissing reports in Israeli media."

SO:  No Putin commitment to Syria, no jets, no troops, no nothing.  But Putin did host the leaders of the insurgents in Russia as his honored guests a few weeks ago to work on an agreement for post Assad Syria.


Winston Churchill's picture

Never believe anything until its officially denied.

beaker's picture

Here's a concept:  Raise rates so as to encourage people to actually save again - and all the good that flows out of savings and rational capital investment.

stocktivity's picture

They don't want people to save. They want people to spend their savings and then go into debt to spend more.

Kolchak's picture

Yeah some folks just don't get the matrix do they. You don't do ANYTHING the masters don't want you to, problem for them is...  their fucking days are numbered and it ain't in months.

TheFutureReset's picture

That's like asking a junkie to go cold turkey. Not going to happen if they have a say. 

F0ster's picture

“@RT_America: #PopeFrancis issues 'EXTRAORDINARY HOLY YEAR OF JUBILEE IN 2016'
9/1/15, 10:37 AM
glenlloyd's picture

Wouldn't that make it a shitwich? Perhaps McD's would like to carry the new McShitwich at their fine dining establishments?

B2u's picture

FUCK OFF Yellen.

BandGap's picture

Yellen looks like my dog when someone makes a funny fart sound.

Temporalist's picture

Looks to me like he's sniffing his own fart and trying to figure out if it was last nights baby brains or the mornings baby blood pudding he's smelling.

Hopeless for Change's picture

From the thumbnail on the ZH Home Page, I seriously thought it was Jamie Dimon.

asteroids's picture

Amerikan "exceptionalism" is causing the world to re-think the US dollar.

RawPawg's picture

one would think the Fed has/had a think tank that would look into all shtf scenarios...if only 

KnuckleDragger-X's picture

Your mistake is in using the word think.....

Insurrexion's picture

Mr. Yellen is thinking...

"My pussy could use some Quantitative Tightening...hmmm? Ya that's it!"


"Hmm. Maybe my turd-cutter too, while they are down there..."

unplugged's picture

thanks for ruining my lunch