How much will the central banks lose on their QE bond holdings?

by Shaun Richards

As we start a new financial week the calendar sees the Bank of England restart its plan to reduce its large UK bond or Gilt holdings. But before we get to that the Swiss National Bank came racing out of the traps this morning with this.

According to provisional calculations, the Swiss National Bank will report a loss in the order of CHF 132 billion for the 2022 financial year. The loss on foreign currency positions amounted to around CHF 131 billion and the loss on Swiss franc positions was around CHF 1 billion. A valuation gain of CHF 0.4 billion was recorded on gold holdings.

There is an obvious issue here with the concept of a central bank as a hedge fund. Also the SNB has been raising interest-rates in 2022 from -0.75% which is a little awkward when you have built up an enormous store of cash abroad. The main loser here I would imagine is all the bond holdings ( mostly in Europe) as bond holding values decline as interest-rate rises have seen bond yields rise. The investements are usually in short-dated bonds but they have been hit hard in the last year or so.

There is a real world consequence from this because the era of central bank’s bestriding the world like masters of the universe has led to them being able to send money to their national treasuries.

After taking into account the distribution reserve of CHF 102.5 billion, the net loss will be around CHF 39
billion. Pursuant to the provisions of the National Bank Act and the profit distribution agreement between the Federal Department of Finance and the SNB, this net loss precludes a distribution for the 2022 financial year.

So no money for the Swiss treasury this rime around. I have regularly pointed out that the profits from the QE era were being financed via buying from the same bodies claiming the profits! Or if you prefer what could go wrong? Indeed many European markets had central banks ( ECB & SNB) competing to buy at times which us why we saw negative bond yields even in Italy.

Bank of Japan

If we now switch to the other Currency Twin as we used to call them we see a domestic issue in play and it comes from this announcement.

The Bank of Japan shocked markets in December by widening the band in which 10-year government bonds could trade from 25 to 50 basis points. Investors responded by pushing two- to 10-year yields to their highest since 2015,  ( Financial Times )

That is again rather awkward when you own so many bonds or JGBs. It owns more than half the market or if you prefer the end of year accounts show this, 564,155,789,895,000 Yen’s worth. Actually in typically Japanese fashion this apparently QE retreat has come with more of it.

The Bank of Japan just set a new monthly record for bond purchases. They bought more than $128 Billion in Japanese government bonds this month. ( @stackhodler )

There was more emergency bond buying last week as the Bank of Japan continued to apply a policy of Face. After announcing a move to a bond yield of 0.5% they have tried to stop it and with today’s range being from 0.5% to 0.51% they are having more than a little trouble.

But for our main purpose today there is the issue that the Bank of Japan is taking losses on what is an enormous portfolio. The March JGB future was over 151 in the last year whereas it is 146 now. So when we look at the size of the Bank of Japan position mark to market losses are already large and the only body stopping them getting larger is the buying of The Tokyo Whale itself. Which of course leaves it with an ever riskier position.


The European Central Bank is next on my list because it too pushed bond yields negative and so gave us peaks in prices. At this point it is hard not to think of all those Italian bonds it bought at negative yields but also even Germany saw quite a bubble as we mull the Swiss buying too. One way of looking at this is the Italian bond future which went above 154 and is 112.5 as I type this so the PEPP purchases look simply awful on a mark to market basis. You do not need to take my word for it as here is the ECB blog from last week.

Government borrowing rates have increased sharply on the back of high inflation and the normalisation of monetary policy.

It is both in the other side of that trade and via a combination of open mouth operations and higher interest-rates is enforcing it.

It is pretty much obvious that, on the basis of the data that we have at the moment, significant rise at a steady pace means that we should expect to raise interest rates at a 50-basis-point pace for a period of time. ( ECB President Lagarde)

Those who have followed me since the beginning may recall that the claims from the ECB that it could not lose money as long as Euro area bonds were repaid. The problem this time around is that it paid more than 100 for them sometimes much more and will only get 100 back. Whilst it can turn a blind eye to mark to market losses bonds will mature and it plans to do this.

From the beginning of March 2023 onwards, the asset purchase programme (APP) portfolio will decline at a measured and predictable pace, as the Eurosystem will not reinvest all of the principal payments from maturing securities. The decline will amount to €15 billion per month on average until the end of the second quarter of 2023 and its subsequent pace will be determined over time.

Next up is the issue of the ECB being backed by so many different national treasuries ( 20 now with Croatia). Profits and losses are usually 18% for the collective numbers and 82% for the national central bank. So eyes will sooner or later be on Italy again.

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Doe the moment the flow of money from Euro area central banks to their national treasuries is over.

The Federal Reserve

Last July the Fed told us this.

The need for the Fed to increase the policy rate expeditiously to address inflationary pressures is projected to result in the Fed’s net income turning negative temporarily.

Ah “temporarily” we know what that means! But there was more.

The associated increase in market interest rates has also led to an unrealized loss position of the SOMA portfolio, which could become larger in the near-term

It has. Anyway back then they argued this.

As a result, remittances are suspended for three years in the baseline and a deferred asset is recorded on the Fed’s balance sheet, While the deferred asset reaches a peak of about $60 billion in the baseline projection, the tail risk in these projections, represented by the upper edge of the dark-blue area, indicates that the deferred asset could reach as high as about $180 billion.

Deferred assets are the new euphemism for losses by the way.

For the US taxpayer the issue is that the flow of money from the Fed is over.

The Fed transferred back $109 billion for 2021, the central bank said in March. That was well over the $86.9 billion in so-called remittances handed back in 2020. ( Reuters )

At the moment the account at the Fed is – US $20.5 billion.


The biggest irony of the present situation is that central banks have enforced losses on themselves. The cost of QE is their own short-term interest-rate which they have raised quite a bit in 2022 and likely will do more in 2023. Even worse in their orgy of bond buying after the Covid pandemic they paid such high prices for bonds that there is little yield in return. So the cash flow situation is awful.

Next up is the issue of the capital situation which is even worse. If you pay 130 for a bond which matures at 100 there will eventually be a problem. But active QT or bond sales means you have to take some form of loss as you are selling for less than you paid and for the reasons explained above there is little income to cover this. Ditto for bond maturities.

Why did they not plan ahead? Well I did because if we go back to September 2013 I wrote a piece in City-AM suggesting the Bank of England take advantage of a better economic period to shrink its holding and thus potential for losses. Instead Governors Carney and Bailey did more not less.

So now they emerge blinking in the sunlight singing along with Sweet.

Does anyone know the way, did we hear someone say(We just haven’t got a clue what to do)Does anyone know the way, there’s got to be a wayTo blockbuster

This is not the end of the financial world because central banks can always print more money. But as the money printing fed the inflation we are now experiencing it would be logically inconsistent to print more right now.



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