Both ECB And BOJ Are Just Months Away From Running Out Of Bonds To Buy

Tyler Durden's picture

With the Fed contemplating whether to hike again next month and start "normalizing " its balance sheet before the end of 2017, the two other major central banks are facing far bigger problems.

* * *

Two months after the BOJ quietly started tapering its QE program, when it also hinted it may purchase 18% less bonds than planned...

... Governor Haruhiko Kuroda admitted last week that the Bank of Japan’s bond holdings are currently growing at an annualized pace of only ¥60 trillion ($527 billion), 25% below the bottom-end of its policy range, and confirming that without making any formal announcement, the BOJ has quietly followed the ECB in aggressively tapering its bond buying program.

Under questioning from opposition party lawmaker Seiji Maehara, who noted that the pace of bond accumulation by the BOJ had slowed, Kuroda said the trend could continue, without elaborating. He noted that the central bank’s target is to control interest rates rather than the amount of bond purchases. "This development signals to me that they are going with rates without talking about a quantitative target," said Atsushi Takeda, an economist at Itochu Corp. in Tokyo. "That will be better when they think about an exit.”

While the BOJ's purchase slowdown has been visible for months in data released by the central bank, Kuroda’s confirmation of this reality in parliament last Wednesday marks a stark change. As Bloomberg notes, until now he’d struggled to emphasize that the annual pace could vary from an indicative 80 trillion yen, depending on the state of the economy and financial markets. He now appears to have thrown in the towel.  Meanwhile, investors are watching for any hint of tightening in monetary policy amid speculation that the central bank’s bond purchase regime is unsustainable and as consumer prices in Japan are expected to pick up later this year. The most likely way for the BOJ to begin tightening would be scrapping the 80 trillion yen guideline altogether, especially since the central bank is no longer following it.

"The Bank of Japan appears to be ramping up its efforts to improve communication with the market to lay the groundwork for its next move - tapering," Bloomberg Intelligence economist Yuki Masujima wrote in a report on Kuroda’s remarks.

What was surprising to markets is that Kuroda's unexpectedly hawkish comments had virtually no impact on the market last week; if anything they led to an even weaker Yen, something which on the surface would seem paradoxical; however it was reassuring for the BOJ and could boost arguments in favor of dropping the 80 trillion yen reference point.

Speaking in an interview with Bloomberg in April, Kuroda said the BOJ would keep as a reference point the aim of increasing its holdings of government bonds at a pace of around 80 trillion yen per year. After four years of aggressive monetary stimulus, and with his term set to end in April 2018, Kuroda is still far from his goals while his Federal Reserve counterpart Janet Yellen is taking rates higher and policy makers in Europe debate tapering. These three central banks have all run up huge balance sheets since the financial crisis after buying bonds and other assets.

In an unexpected admission that even central banks are subject to simple math, Kuroda also revealed some of the BOJ’s modeling on balance sheet risks, indicating that a BOJ simulation found that a 100bps increase in long-term yields could mean a valuation loss of ¥23 trillion on its bond holdings, equivalent to a DV01 of roughly a $2 billion.

* * *

And while the the BOJ is quietly tightening ahead of an inevitable official taper which it will have to commence over the next year as it runs out of monetizable private bonds to purchase, the ECB finds itself in a far worse situation as it may have just 4 months before it runs out of eligible German bonds to purchase. According to analyst calculations based on ECB bond-buying data published at the start of May, the European Central Bank bought roughly 400 million euros fewer bonds in Germany in April than its rules allow.

According to ABN Amro's Kim Liu, in April the ECB deviated from the capital key in Germany by around 400 million euros when excluding corporate and covered bond purchases and adjusting for Greece.

The shortfall raises questions about how close the ECB is to hitting its bond-buying limits in Germany, the euro zone's benchmark issuer and (at least until now) the deepest and biggest source of bonds under the ECB's QE program which is currently scheduled to run until the end of 2017.

"It was by far the largest deviation, at least for Germany, and for me suggests that on top of the political stress and smoothing of purchases, there are scarcity constraints for the Bundesbank," said Pictet Wealth Management senior economist Frederik Ducrozet, quoted by Reuters. "What it means is that the ECB has to be very cautious with its exit and if they don't taper within less than six months (of ending the programme) something might have to give."

Here's why:

ECB asset purchases are based on the so-called capital key, meaning the central bank buys a country's bonds in line with the size of its economy, making Germany the biggest source for the scheme. According to Barclays, if the ECB maintains its buying program as is, it will hit its mandated, 33% ceiling on German Bund holdings as soon as October, or just over 4 months from now.

Furthermore, according to calculations shown previously, based on ECB data in just six months the average maturity of monthly German debt purchases by the ECB has dropped to under five years from more than 10. That suggests that a shortage of longer-dated eligible debt is forcing the Bundesbank, which buys securities on behalf of the ECB, to take advantage of recent rule tweaks to buy more shorter-dated bonds. Reuters adds that while that shift was expected after last December's change allowing the ECB to buy bonds yielding less than the -0.40% depo rate, "the speed at which the Bundesbank put that to use has taken markets by surprise."

According to ABN's Liu, "this means that the average maturity of monthly German purchases remains much lower than those of other countries and that the Bundesbank continuously is forced to buy short-dated bonds with yields that are below the ECB's deposit rate."

Germany is not the first country whose bonds are becoming scarce: the ECB has already deviated from the capital key in Ireland and Portugal, where it is running out of bonds to buy. However, the latter two countries are tiny in terms of supply compared to the budgeted monthly purchases from Germany. The German bond scarcity shows that the ECB would struggle to extend the scheme without further changes to its own bond-buying rules, and one option is simply to raise the 33% self-imposed ceiling, although that would likely require a substantial political intervention, and it would also make the European bond market even more illiquid as the ECB ends up owning half of German bonds.

* * *

For now, the ECB has been lucky: the economic situation in Europe has been improving, with inflation posting a modest pick up, and all signs suggesting that Mario Draghi will be able to taper - not because he wants to but because he has to. Last Monday, ECB board member Yves Mersch said the ECB was close to replacing its negative view on whether the euro zone economy would reach growth targets with a neutral one, providing yet another justification to reducing its unsustainable bond purchases.

As a reminder, in December the ECB already tapered its monthly purchases by €20 billion to €60 billion in April, while money markets price in roughly a 70 percent chance of a rate hike in early 2018.

"The ECB can always get around its rules, it has the flexibility on whether to buy central government or local government or agency debt to fulfill its quotas," said Marchel Alexandrovich, senior European economist at Jefferies. "But the longer QE goes on, the more the ECB will have to think about changing the rules again ... And the issue now is the willingness to carry on with QE."

Indeed, and as for European false dawns, just ask Jean-Claude Trichet and the infamous rate hike of 2011 which launched the most serious leg of the European sovereign debt crisis. Should Europe's economy turn south again and the central bank be forced to keep or even boost its QE, Mario Draghi bank may suddenly find itself in very big trouble. That, or simply do what the BOJ has been doing for years, and start buying ETFs and single stocks.

One final point: even if all goes according to plan, recall that the only reason stocks are at all time highs, is due to the $250 bilion per month, or $1+ trillion YTD - an all time high - in central bank purchases; purchases which are only thanks to the ECB and BOJ. With both banks now having no choice but to trim their asset monetizations, the outlook for risk assets is anything but good.

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hedgeless_horseman's picture


"...recall that the only reason stocks are at all time highs, is due to the $250 bilion per month, or $1+ trillion YTD - an all time high - in central bank purchases..."


"You gotta be Johnny on the spot with the ammo, got it? Or we're dead."

Soul Glow's picture

It's all just inflation, the "growth" that people think they see.  Thus why central banks need inflation targets.  Without inflation asset prices wouldn't rise.  The real question is why do the central banks want rising asset prices?

Other than the obvious that it hides the charade of the fiat system, the elite oligarchs of this world want inflation because first they can afford rising asset prices and second they are the ones who own the assets and thus benefit from the rising price.  If gas goes up a dollar it won't affect a billionaire.  The billionaire doesn't notice the increased gas bill, it is noticed by the working class person who lives month to month.  And the billionaire if not owning a gas company owns stock in one.  These are the pillars of why inflation is good for the rich.

BigFatUglyBubble's picture


And a bonus is it inflates wages into a higher tax bracket, Nifty!  Synagogue of Satan is good at what they do.

r3phl0x's picture

Also allows them to give the plebes 2-3%/yr raises, helping to hide how badly they're getting fucked in real terms.

Oracle of Kypseli's picture

@ soul glow

Commodities are struggling and will be crashing later. (PM's are supressed with fiat) Paper assets and real estate are inflated.... for how long? Who knows but gravity is a bitch.

OpenThePodBayDoorHAL's picture

People forget that "inflation targets" were invented when inflation was 15%+ and they wanted desperately to get them down to 2%. LOL now CB's are 180 degrees from that wise policy intended to preserve the integrity of the product they produce.

garypaul's picture

Does anybody understand these articles? I sure don't. What's stopping the CB's from just creating a buncha bonds and buying them? (both can be created out of thin air)

noless's picture

They're monetizing government(and corporate I guess) debt, that way Central Banks and governments can funnel the money to who they want without having a hyperinflationary event, otherwise assets go bidless and deflationary collapse.


That's the best I can do.

garypaul's picture

I see. In other words, the much-vaunted "well-developed bond market" of the U.S. is just acting as a giant sponge to prevent the excess liquidity from spilling over (into inflation). Someday that will overrun and it will be breached... and THEN we get hyperinflation (?)

yogibear's picture

They can own everything.

Welcome to North Korea.

Bigly's picture

There are still some rocks to turn over. Do not fear.

BigFatUglyBubble's picture

Your troll should be orange  :^)

Bigly's picture

Agreed but i could not get orange....this was closest  ;)

LetThemEatRand's picture

Oh, so this is why gold and silver keep getting hammered.   "Only" $527B a year in monetizing debt.

Davidduke2000's picture


Oh, so this is why gold and silver papers keep getting hammered, nobody sell bullion. 


What a problem to have running out of stuff to buy. Most people have a hard enough time just paying their bills.

LetThemEatRand's picture

Interestingly, most people have a hard enough time just paying their bills in large part because of the central bank buying of everything before central banks became worried about running out of stuff to buy.

yogibear's picture

North Korea, bankster style.

Max out the  people with debt so you own them, keep the .01% getting wealthier by elevating their assets.

Stealing from the low end to give to the high end. 

Yen Cross's picture

  I'm noticing sovereign bond yields creeping higher across Europe, and with the euro at these levels, Draghi has some serious shit to deal with.

  Europe doesn't have the deep corporate bond market the U.S. has, so the banks will get hammered hard on defaults, and payback obligations

 Don't get me started on the already strained liquidity, the ECB and BoJ have created in bond markets.

Vageling's picture

Wait till Macron get his Eurobond crap going. 

Paul Morphy's picture

Any uptick in Eurozone sovereign bond yields threaten to ignite the vast amounts of sovereign debt that there is throughout national Eurozone member balance sheets. My own countries national debt has increased frm €60 billion to €200 billion since 2008 (and arguably the real figure is far higher when you include all other debt).

More and more sovereign taxes will have to be set aside to service the interest (yield) costs for all this debt. 

Soul Glow's picture

And did you see how many bonds they bought last nigh?!  Direct correlation to the amount their currencies dropped to the rise in bond yields.  Even with the massive money printing stocks fell big.  With this reprieve in pm pricies the time to stack is now.  I'll definately head to the coin shop in the next week or so and stack up!

Yen Cross's picture

  I see equities headed lower on liquidations. ;-)

knukles's picture

Don't be such a pessimist.  Even Chuck Norris is afraid of The Donald.

Yen Cross's picture

  Hey Knuks, glad you're doing well.  A couple of other things... Margin requirements are getting squeezed hard by what few retail f/x brokers are left in the States.

   Also margin maintenance, and closeout periods are being shortened. I'm so tired of the retail bullshit in the States I just opened a CME account, and transferred everything else overseas.

  I even looked into BTC for a little fun, and FINRA is way out of control. BTC in the States is more controlled than gold and silver are now [financial disclosure]

  Tightening margin requirements, helps "market makers" NOT traders. It's just a way of centralizing control of the ponzi.

coast1's picture

Hey SG,,,,I am out of town until next wednesday, but on Wednesday, gonna take some cash from my hidden spot, I dont use banks except for bills, and buy silver,,,After much research, I feel  that small emoninations are best, like 1/10th ounce minted coins...Hopefully they will smash the price down next week also...

Soul Glow's picture

I can do it for you if you want to buy sooner.  Just let me know where your secret spot is.


coast1's picture

summer of rage?   keep your powder dry...

off topic, but something just came to me that I never told you guys....My x-wife was born within a month of barry soretoro in the same hospital...I asked her to see her birth certificate and it looked nothing like barrys birth certificate...not a smoking gun, but just sayin...

asteroids's picture

It won't be a crash, but an avalanche when the bond market goes.

buzzsaw99's picture

there are still some puppies they can buy.

JailBanksters's picture

Whats worse, Having Bonds and nobody wants to buy them or running out of Bonds to buy ?

But it sounds a bit like the Woman calling 911 because McDonalds have run out of McNuggets, it's an Emergency !!!

Or are they just admitting these Bonds are just a Ponzi Scheme and you HAVE to sell New Bonds to pay out the Old Bonds

Tonterias's picture

ECB, BoJ, FED jokes

Vageling's picture

No worries. He'll give Juncker a bottle of brandy and the rules no longer apply and he can buy ALL! Hey! He has a printer! CTRL-P away! It's how the EU roles. Rules are for little people. Not for them. They are the prosecutor, jury and judge. Ghordious likes it that way since responsibility is an alien word to him. Blame the people! All the Europeans their Fault, as that muppet screams. 

Nothing ever changes... Always the fucking Germans. 

Giant Meteor's picture

No worries. A few crayons and some construction paper, they'll be right a rain again.

dogballs's picture

Warm up the printing presses. Let's make more fiat. Everyone thinks it has value.

Davidduke2000's picture

Not a big problem, they will buy us stocks as usual

khakuda's picture

They are buying stocks in addition.

Omega_Man's picture

so they can print money but not bonds? sounds like bullshit

journal's picture

Perhaps I am missing something on ZH. There seems to be a lot of speculation/ananlysis about all the bad things that will happen if rates are allowed rise, government default, market crash etc.. Hence someone is always commenting that it won't be allowed to happen. Other than general statements about everything blowing up, it seems little is said specifically about why they can't print forever, pension funds , insurance companies failing?   

dlfield's picture

So basicAlly what is happening, and will happen, is both the debt and equity markets are overbought, and the velocity of money drops to zero.

globalintelhub's picture

Open the floodgates for starved US investors ..

Paul Morphy's picture

2014 ECB balance sheet = €2.2 trillion

2015 ECB balance sheet = €2.8 trillion

2016 ECB balance sheet = €3.7 trillion.


Not to mention exploding imbalances throughout Target 2 ECB mechanism

lolmao500's picture


Joe A's picture

They can always buy up derivitives. There is no shortage of those...

cat2005's picture

Good God in Heaven . . . don't give them any ideas

desirdavenir's picture

250bn per quarter (not per month), 1tr per year (not ytd)

Cutter's picture

The first chart says it all. Kuroda and the BOJ are relying now on their previous demonstration that they will do anything to keep rates low. So they can taper as long as the market continues to respect their stated commitments and their firepower.

As the first chart shows, they tapered short term buys until in January when the 10 year JGB hit their stated .10 limit, and then in they came all guns blazing to drop the rate to their stated goal, causing the spike in the chart.

They have merely changed the policy from defined QE limits, to reactionary QE. The only difference will be that the former produced a nice flat chart, and the latter will look like the Rocky Mountains.

In the end, it's still default and massive devaluation, as soon as their interventions lose the respect of the market.