Central Bank Chatter: Focus Shifts to Balance Sheet Strategies Amid Yield Curve Inversions

Perhaps it is in the face of deepening yield curve inversions and dropping longer end real rates in particular, that some of the central bank chatter has recently focused on the balance sheet strategies again.

 

At the Sintra panel, the heads signalled being content with current decisions and pace of shrinkage, but in some of the more hawkish minds might still be contemplating how the reach and effectiveness of policies could be increased.

EUR long end yields have been relatively resilient to policy tightening for a while

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... bringing balance sheet strategies back into focus

Bloomberg reported early yesterday that some European Central Bank (ECB) council members were mulling a faster pace of balance sheet reduction via active asset sales from the Asset Purchase Programme (APP) portfolio or phasing out the reinvestments of the Pandemic Emergency Purchase Programme (PEPP) portfolio. Of the ECB’s €4.86tn stock of QE assets, the APP roll-off – once reinvestments come to a full stop next month – could equate to around €370bn per year, just extrapolating the current maturity profile. Active sales could be a next step once targeted longer-term refinancing operations are fully repaid by the end of next year. That the repayment of the €500bn of these loans has happened without major hiccups this week is probably encouraging the balance sheet hawks.