The Only Thing That Matters For Bond Traders, In One Chart

Inflation outlook, rate differentials, projected growth, positioning, quants... there are countless explanations provided daily to explain why bonds trade the way they do. And yet, as Bank of America shows today, as of this moment just over 50% of the global bond market returns can be explained with just one thing: central bank balance sheet changes.

BofA explains:

Central bank assets, most of which are held in fixed income assets, are now equivalent to 31% of the $49tn fixed income universe tracked by the BofA Merrill Lynch Global Fixed Income Markets Index (GFIM); and the percentage of global bond market monthly returns explained by the monthly change in central bank balance sheets has dramatically increased in recent years.

And with more than half of bond returns now driven by central banks, BofA goes so far as to say that "Central banks have become the bond market."

BOfA's evidence:

Note how in the past year, the months in which central bank asset purchases have either declined or been very small have coincided with months of weak performance from global bonds (Table 2). This was particularly the case in the fourth quarter of last year and a similar pattern is emerging this summer.

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Of course, this is a problem because with central bank balance sheet projected to decline for the foreseeable future as Citi showed last month, at least until global stocks tumble and/or the next recession hits, it would suggest that yields have just one direction to go.


lasvegaspersona Yen Cross Thu, 07/13/2017 - 13:47 Permalink

Ultimately all that 'asset' stuff will want to become 'wine, women, song, houses, planes, trains, automobiles, rice, get the point....when there is not enough 'stuff' the prices will rise....unless Janet really does have Utopia command and control figured out.Maybe she figured out how to make gold out of animal spirits....

In reply to by Yen Cross

Cognitive Dissonance Thu, 07/13/2017 - 13:33 Permalink

So much for Central Banks losing their influence. I argue their influence will continue to grow right up to the point of self immolation. They will be at their strongest just before they become their weakest. That is the nature of the process of squandering 'trust'.The more captured the participants, the stronger the bond is until it finally breaks.

Countrybunkererd Cognitive Dissonance Thu, 07/13/2017 - 13:41 Permalink

Everyone is and will pile in until ^^^ happens.  One Example: 40% of excess reserve payments are to foreign banks.  What else can "one" do except get out and trade chickens and baked beans for beef and corn / buy metals on hope a global currency reset doesn't melt and reprice the value to 1/2 of what it is now?I would like that new F-250 for... ummm, 11,000 chickens please.

In reply to by Cognitive Dissonance

ChargingHandle Thu, 07/13/2017 - 13:50 Permalink

Which market sector doesn't have central bank's tentacles wrapped tightly around it? Bonds... check, equities... check, energy/oil... check, precious metals, ...check. Central Banks have become viritually the entire market, yet no ine knows what's behind the curtain. Audit the Fed is a dream that will never happen. Who's money is this again?

small axe Thu, 07/13/2017 - 13:51 Permalink

and it's all gravy when you can cover your losses with endless paper, or perhaps more importantly, endless bullshit theories that the average person is told they are not competent to understand as the wealth transfer shifts into high gear. CBs own us, lock, stock and barrel, if not already, then they will within a few years.The only way out is an extinction event for this charade of a market, something that will rock the system to the core and collapse the banking cabal.

SDShack Thu, 07/13/2017 - 13:51 Permalink

I've been saying the central banks have had defacto control of the bond markets for years. The banks learned their lesson from the European (Greece/Cyprus) bond crisis on how to neutralize the bond vigilantes. In their mind, when you control the bond market, PLUS have the printing press, you essentially have the means for a perpetual Ponzi. Everyone now realizes the banks totally control all the financial markets...bonds, equities, govt. debt, metals, energy, etc. With this they can continue the can kicking until either something truly unexpected world wide happens that causes their leverage to crash the system, or they choose to implode the system in the greatest false flag in human kind to usher in their New Feudal World Order.

Money_for_Nothing Thu, 07/13/2017 - 14:59 Permalink

Central Banks are fighting a passive/aggressive war. Things are coming to a head because the first-world is running out of cheap food. That is the fat part of fat-dumb-and-happy. North Korean Regime change will probably fix the world for another twenty years. China will have a market for its goods and Russia will have a market for its energy. The North Koreans will be less screwed than they are now. Banks will have twenty years to write off their bad loans.

U4 eee aaa Thu, 07/13/2017 - 15:38 Permalink

Just wait until business gets it into their corrupt heads that the CBs will be buying their junk in order to preserve the overall bond market

"It's like a license to print money!"

tttan Thu, 07/13/2017 - 15:42 Permalink

That is why every major central banks are dovish in their policy to protect their portfolio. Aggressive hike will lead to major loss in their portfolio and also their job. Slow and gradual rate hike will continue to be their mantra for a long time. Note that the fed borrowed about 2.4trillion At 1.25% from the banking system through IOER to finance their entire portfoli of 4.5 trillion, so making a nice spread for the treasury. About 50% of them will mature in 5 years time. see attachment portfolio maturity profile from pimco. what happen if the banks found new investment opportunities which will drain their lending from the fed.?  That is why the fed allows banks to borrow from the public at .05% and lend them to the fed at 1.25% to make them happy..