Central Banks Now Own A Third Of The 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.

And then there are ETFs, which have done to hedge fund equity holdings what central banks have done to fixed income crowding out: as JPM notes, "a secular shift away from active equity managers, mutual funds and hedge funds, towards passive equity mutual funds and ETFs. As we discussed before, this secular shift since the financial crisis of 2008 is driven by the inability of active equity managers to outperform established and well-known equity benchmarks such as the S&P500 index. Figure 11 shows this dramatic shift away from active equity funds towards passive equity funds in the US since 2008."

JPM highlights that this crowding out of active managers, both bond and equity managers, has been reducing trading activity since the Lehman crisis. This is shown in Figure 12 by the trading turnover of DM equities and US government bonds, both of which have been declining secularly over the past eight years.

And this brings market liquidity, and volatility, into the discussion. The secular decline in trading turnover has been accompanied by a reduction in market liquidity and, in particular, market depth. In turn, reduced market liquidity and market depth is further discouraging active managers to trade or change positions as the transaction costs hurdle increases. And this reduced propensity to trade or change positions suppresses the average level of market volatility over the long run.

Which while perhaps acceptable in the long run, is a major risk in the short term, as reduced market liquidity can act as an amplifier of market volatility if a shock or surprise forces many investors to change their positions all at the same time. So market liquidity acts as a double-edged sword for market liquidity, and ironically the less liquidity, the less trading, which leads to even less liquidity and so on, until - at least in a "thought experimental" world - just one trade gets to "readjust" (in lieu of a more disturbing verb) the entire market.


J S Bach SpanishGoop Sun, 06/04/2017 - 10:14 Permalink

Central Banks Now Own A Third Of The Entire $54 Trillion Global Bond Market” And pray tell… whom doth own the Central Banks?Aye… there’s the rub.Whether 'tis nobler in the mind to suffer the slings and arrows of outrageous debt-slavery, or to take Arms against a Sea of Usurers, and by opposing end them: to die, to sleep~ Hamlet & Eggs - 2017

In reply to by SpanishGoop

two hoots SoilMyselfRotten Sun, 06/04/2017 - 12:41 Permalink

A global monatary/value/distribution reset rest only in their hands, they just have to let their share increase to the point of unquestionalble control.  It will then be time to mass produce Soma.  Without a Trump we, the US, will be thrown in the mix. Other:    From the election until now:Hillary Clinton still concerned about the only thing that ever concerned her, herself, her ego.   She is/was only a speech and wannabe goddess.  I don't care if she ever gets over it as it only paints her true colors for all to see.Trump is not in the presidency for status, he is fighting the system for the system.  He is willing to take the personal licks to accomplish goals. 

In reply to by SoilMyselfRotten

7thGenMO J S Bach Sun, 06/04/2017 - 11:17 Permalink

Who are the Owners?  Who are the Owners of The Fed in particular?A visiting Russian friend said that when Putin came to power it was necessary to go many layers deep to determine who was the invisible hand that owned Russian assets.  In the case of Lukoil, it turned out to be Rothschilds out of Switzerland.

In reply to by J S Bach

Offthebeach SpanishGoop Sun, 06/04/2017 - 10:43 Permalink

We have already a New Economic Policy.   New is nice.  Everyone likes new.  Economic is...um...ah...economic...um..it's complicated. Policy.  It's the word 'planning ' but on  Prozac.  And um don't ask about what the plan is, what it has or hasn't accomplished,  or what happened to the previous plans. ThankyouV.I.Lenin  

In reply to by SpanishGoop

Offthebeach 7thGenMO Sun, 06/04/2017 - 13:08 Permalink

To think, we once had a country with no central bank, no standing army, pretty much just barbaric gold or silver or personal IOUs, no internal security beurocracy and we conquered a continent,  built every major city, became a world power and basically no debt.Of course you had to work, shovel to Carnegie,  or eat your bad debts, but no generation further impoverished the next, just the opposite.

In reply to by 7thGenMO

fockewulf190 SpanishGoop Sun, 06/04/2017 - 11:22 Permalink

And then what? Perhaps this.

Central bank operations will eventually force the big commercial banks to merge because of reduced profit levels. The central banks will not change their ways though. They will continue to expand their balance sheets and eventually force the remaining banks to close, or merge with a central bank. Then the central banks will start merging amongst themselves, until we are left with one "Iron Bank". Control will be complete, and current levels of bad debt being held in the currently existing fiat currencies becomes irrelevant to an entity that can never be eliminated absent of an extinction level event, and has the power to reset the entire system to a new global currency. Remember, Globalism is their religion, and ultimate control can only be achieved once the entire financial system is assimilated.

They are in a race against time, because if they lose control of this transition, the hundreds of trillions in derivatives outstanding will blow up and the Great Reset will appear. So, central banks print billions every month out of thin air and buy more and more assets with it, while at the same time the "financial system" is being prodded to reduce the total amount of derivatives in existence. Will it work? I doubt it, but it sure looks like the plan to me. They can't afford another Lehman Brothers event, so the Lehman Brothers of the world must disappear...but not from collapsing, it must be done through mergers and acquisitions. Funny that the CB's have to kill off all their children to achieve their goals.

In reply to by SpanishGoop

JackMeOff Sun, 06/04/2017 - 12:06 Permalink

Nothing to see here people...  ignore that man behind the black curtain.  While Central Bankers think they are "wizards", we all know they are cowards whose hand will eventually be caught in the cookie jar one too many times and then all bets are off.

Give Me Some Truth Deplorable Sun, 06/04/2017 - 21:36 Permalink

As far as I can tell, the ONLY place that "audit the fed" is mentioned is Zero Hedge (okay, and Ron Paul sites). But not at:1) The NYT2) Wa Post3) 4 Network News organizations4) AP, Reuters, Bloomberg, etc.5) The White House6) USA Today7) "The Rush Limbaugh Show"8) Congress 9) Any of the other major newspapers or magazines10) The National Review, The Weekly Standard, BreitbartThis is actually about 30 MSM organizations (and a couple of "conservative" sites) and our White House (we could include the U.S. Treasury on this list).If so many members of the establishment don't want something to happen and rarely talk about it, we can conclude that this proposal scares the hell out of these people. For this reason, it must happen. But won't.  

In reply to by Deplorable

Lumberjack Sun, 06/04/2017 - 10:07 Permalink

Hillary needs to be institutionalized.


But there comes a point when you just have to accept reality — and Clinton herself seems to be having a tough time with that. The Code interview offers pretty broad insight into Clinton’s psyche, nearly seven months on from the election.

The conversation starts with Mossberg asking Clinton to name one major misjudgment — discounting any outside forces — that her campaign made and that she wishes she had done differently. It took Clinton 17 seconds to mention the word “Russians” — and a further 10 seconds to bring up the way her private email server was used against her. Keep in mind, this was after Mossberg asked her to name just one legitimate mistake she and her campaign made. She couldn’t do it.

Endgame Napoleon Lumberjack Sun, 06/04/2017 - 10:23 Permalink

It was not even the server issue that ensured Clinton's loss, although the foreign policy issues are all that the MSM talks about. It went back farther than that. Hillary is associated with policies launched during her husband's reign, like NAFTA and the ramp up of trade with China, that accelerated the demise of the U.S. middle class via offshoring. She is associated with mass, taxpayer-subsidized immigration and an identity politics mentality that is 1) not making this country safer and 2) leading to a lot of underemployment and job displacement of citizens. The enormous fortune that Hillary and Billl made off of global contacts made in office reinforced the idea that those Nineties Era, middle-class-killing policies were enacted mostly to pad the pockets of politicians, like Bill and Hillary Clinton. That is why everything Hillary said sounded hollow, even when she -- the big hear-me-roar feminist -- brought up her grandchildren a million times, rather than addressing issues that are tanking the U.S. middle class. She could not do that with any credibility because of supporting the policies that tanked it over the decades.

In reply to by Lumberjack

Give Me Some Truth Lumberjack Sun, 06/04/2017 - 21:42 Permalink

The entire campaign she had like two press conferences. I think each one was 10 minutes long. Maybe she should have had just one?  No, zero.BTW - Why didn't she give a concession speech and speak to her supporters after the poll results were in? We never have learned what really happened and why she couldn't give a 15-minute talk.And our great press corps never asked. 

In reply to by Lumberjack

buzzsaw99 Sun, 06/04/2017 - 10:18 Permalink

turnover just gets you front run. whatever you're in to buy and hold (or die a death of a thousand cuts). plus, with central bankers buying everything even "prudent" short positions get murdered. buy and hold is the logical response.Logic is little tweeting bird... [/Mr. Spock]

GodHelpAmerica Sun, 06/04/2017 - 10:15 Permalink

Not sure why anyone would be planning for deflation with these central bank trends. This is Zimbabwe, Weinmer Germany type stuff here...own real assets...maybe there's one final deflationary gasp, but ultimately this gets resolved through major declines in the currencies...

It's different this time; but only in nominal terms...

In real terms, which is where it really matters, the crash will be the same as it ever was...