Global QE purchases are set to fall sharply in 2018; we expect the ECB’s
QE purchases to decline by EUR 310bn and the US Federal Reserve’s
balance sheet to shrink by USD 230bn in 2018. We estimate the amount
of gross issuance less QE-buying (including reinvestment) will rise by 5%
(USD 160bn) in 2018.
Meanwhile, net issuance less QE-buying excluding
reinvestment is set to move from negative territory to a large positive
amount in 2018 (an increase of USD 780bn next year).
Market size to rise sharply in 2018 after falling in 2017:
We estimate that G4 net issuance less QE-buying excluding
reinvestment, ie the ‘float’, will rise by USD 600bn in 2018 after falling
by USD 180bn this year: a significant USD 780bn difference.
The marked increase will come from both sides of the ledger – higher
net government issuance and a reduction of QE purchases.
Flows to rise more modestly:
We expect total flows, ie, gross issuance less QE-buying including
reinvestment, to rise more modestly in 2018 to USD 3.25trn from
USD 3.09trn: a smaller USD 160bn difference.
This change is smaller than in the ‘float’ due to a fall in redemptions in
the US and Europe which raises the float, and a rise in US and EUR
QE reinvestment which limits the rise in flows.
With the pace of global QE buying already slowing and set to fall further in
2018, we expect bond yields to rise next year. In addition, we expect
inflation breakevens to rise as core inflation increases and a steepening of
the real yield curve to drive up real yields, even though real policy rates
are likely to remain relatively stable as central bank monetary policy
tightening remains modest.
