The next major policy error brewing?
We are all aware that Central Bank Balance Sheets have been pumped up by QE over the past nine years and at some point there has to be a reckoning. Some believe their size could fall by as much as one-third over the next few years and have labelled this the ‘Great Unwind’. This is unlikely to happen without significant fall-out, but the questions are where will the impact be and when will it happen.
In the view of our friends at CrossBorder, it may not be immediate, but the clearest adverse impact is on both the US dollar and the US credit markets. In particular, if ‘real’ term premia on US Treasuries return to normal levels, we can expect 10 year yields to rise by something in the order of 100bp. Equities will be an indirect casualty of negative QE via its effect on the other markets, particularly credits, which appear unambiguously at risk. Overall, in CrossBorder’s view, systemic risks are rising and another major policy error may be brewing.
CrossBorder's full article is available for purchase here.