JPMorgan Chase & Co. Chairman Jamie Dimon said the unwinding of central bank bond-buying programs is an unprecedented challenge that may be more disruptive than people think.
“We’ve never have had QE like this before, we’ve never had unwinding like this before,” Dimon said at a conference in Paris Tuesday. “Obviously that should say something to you about the risk that might mean, because we’ve never lived with it before.”
Central banks led by the U.S. Federal Reserve are preparing to reverse massive asset purchases made after the financial crisis as their economies recover and interest rates rise. The Fed alone has seen its bond portfolio swell to $4.5 trillion, an amount its want to reduce without roiling longer-term interest rates. Minutes of the Fed’s June 13-14 meeting indicate policy makers want to begin the balance-sheet process this year.
“When that happens of size or substance, it could be a little more disruptive than people think,” Dimon said. “We act like we know exactly how it’s going to happen and we don’t.”
Cumulatively, the Fed, the European Central Bank and the Bank of Japan bulked up their balance sheets to almost $14 trillion. The unwind of such a large amount of assets has the potential to influence a slew of markets, from stocks and bonds to currencies and even real estate.
“That is a very different world you have to operate in, that’s a big change in the tide,” Dimon said. All the main buyers of sovereign debt over the last 10 years -- financial institutions, central banks, foreign exchange managers -- will become net sellers now, he said.
Investors are listening closely to policy makers to determine when and how central banks will start reducing their balance sheets. A global bond rout spilled over into equities last week on signs that central banks are taking a more aggressive stance.
In 2013, 10-year yields soared by more than a percentage point over four months on a suggestion by then-Fed Chairman Ben S. Bernanke that the central bank could soon scale back bond purchases -- an episode that became know as the Taper Tantrum.
Policy normalization in U.S., Europe and Japan will cause the term premium to climb over the next two years as net bond issuance in the three regions turns positive, according to BlackRock Inc. The measure reflects the extra compensation investors demand to hold longer-maturity debt instead of successive short-term securities. BlackRock’s term premium projection is still below 0.5 percentage point in 2019.
“The risk of near-term bond-market disruption seems limited,” Burkhard Varnholt, deputy chief investment officer at Credit Suisse Group AG. “Yet, further out, the future path of yields may be plastered with traps. Expect the Fed to readjust their strategy to every step – and to err on the side of caution, not boldness.”
Central banks would like to provide certainty but “you cannot make things certain that are uncertain,” Dimon said.
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