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Analysis: Bond markets should brace for tighter central bank squeeze Dhara Ranasinghe, Sujata Rao LONDON (Reuters) - As the British and Aust Empty Analysis: Bond markets should brace for tighter central bank squeeze Dhara Ranasinghe, Sujata Rao LONDON (Reuters) - As the British and Aust

في الجمعة 6 نوفمبر 2020 - 14:08
Analysis: Bond markets should brace for tighter central bank squeeze
Dhara Ranasinghe, Sujata Rao

LONDON (Reuters) - As the British and Australian central banks prepare to crank up their money-printing presses and the U.S. election outcome ups the pressure for more Federal Reserve action, one thing is clear — already-scarce government bonds will get harder to find. 




FILE PHOTO: A person is silhouetted as he walks past The Bank of England, amid the outbreak of the coronavirus disease (COVID-19), in London, Britain, November 5, 2020. REUTERS/John Sibley
This week, the Bank of England increased its bond-buying by a bigger-than-expected 150 billion pounds ($195 billion), while the Reserve Bank of Australia said it would buy $100 billion ($70.4 billion) in debt over the next six months. 
The aggressive moves build on this year’s accelerated stimulus from central banks, which are battling the COVID-19 shock and uncertainties ranging from Brexit to doubts over the scale of government spending. 
Graphic: Central bank balance sheets swell - [url=https://fingfx.thomsonreuters.com/gfx/mkt/xklvymajkvg/Pasted image 1604589866870.png]here[/url]
Now, amid fading prospects of a Democrat U.S. election sweep and a government spending splurge, some economists speculate the Fed might have to step up purchases of long-dated Treasuries to keep stimulus flowing. 
And the takeaway is that even as governments borrow more, the bond free-float — what’s available to investors — will be squeezed further. 
Gary Kirk, portfolio manager at TwentyFour Asset Management, said years of ultra-loose monetary policy are a certainty, even before the Fed announcement this year that even an inflation target overshoot would not trigger immediate action. 
“This, combined with asset purchases running for at least the next year, in our view means we can expect the demand for fixed income – from sovereigns through to speculative-grade credit – to outstrip supply, resulting in yield becoming an ever more scarce commodity,” Kirk said. 
One could argue such programmes aim precisely at that —making government bonds less attractive so investors are induced to lend to private companies via stock and credit markets. 
The downside, though, is it removes much of the liquid, high-quality assets long-term investors such as insurers must hold to offset their liabilities. It also deprives portfolios of the hedge provided by “safe” sovereign bonds.
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