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The ECB and the BoJ have also been very aggressive in their asset purchases. The BoJ started its asset-buying program in 2013, and has grown its balance sheet to equal the size of the whole Japanese economy and the BoJ owns about half the outstanding government debt. At the start of the Great Recession of 2008-2009, the ECB did not expand its balance sheet by purchasing securities. Instead, at the beginning, the ECB lent trillions of euros to the financial system to insure that banks remained liquid. The ECB ventured into asset purchases in 2015, and the ECB now owns as much as 30% of some key government bond markets, such as Germany and the Netherlands, and a little less of a percentage for markets such as Italy or Spain.


There is growing evidence that the ECB and BoJ have pushed the limits of QE or asset purchases. The problem is that once a central bank becomes the major buyer of government securities, liquidity in those markets dries up. Liquidity to an economy is like oil is to an automobile internal combustion engine. Liquidity reduces market frictions, allows for effective interest rate risk management, and enhances the ability of an economy to grow more robustly. Without liquidity in fixed income markets, economies simply do not function as smoothly and, thus, they grow more slowly. Put another way, at some point the advantages of lower bond yields are more than offset by the disadvantages of a lack of liquidity.


As an aside, we note that the US Treasury market has been influenced in no small way by the massive asset-buying programs of the ECB and BoJ. The existence of trillions of dollars of negative-yielding debt in Europe and Japan exerts a powerful downward influence on US Treasury notes and bond yields. As German Government Bond 10-year yields have declined, investors have sought higher yields from the US Treasury market. As German yields declined, and brought US yields down, the spread of US 10-Year Treasury Note yields relative to German Government 10-year Bonds (Bunds) has traded in a relatively narrow range in the territory of 2.20% or a little more since negative-yielding debt started piling up in Europe.


Figure 3: European Central Bank Assets


Source: Chart Created by CME Group Economics European Central Bank Monthly Bulletins, obtained through the Bloomberg Professional


Figure 4: Bank of Japan Assets


Source: Chart Created by CME Group Economics -Bloomberg Professional


WE NOTE THAT THE US TREASURY MARKET HAS BEEN INFLUENCED IN NO SMALL WAY BY THE MASSIVE ASSET-BUYING PROGRAMS OF THE ECB AND BOJ.


24 | ADMISI - The Ghost In The Machine | November/December 2019


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