Global policymakers are fighting the virus as if it was a war. Unhindered by moral hazard, the cumulative amount of QE from the Fed, ECB, BoJ and BoE sums to $5 trillion in 2020, equivalent to no less than 6 percent of global GDP. Their holdings by year-end will accelerate to $17.5 trillion or about 20 percent of global GDP.

Fiscal packages to cover lost household income and direct and indirect loans to help companies are also being rolled out which will result in huge increases in budget deficits. This is unlike the period following the Great Recession when deficits globally were contracting. This will raise the funding requirement in government bond markets drastically.

“Taken together, the government footprint in financial markets is the largest we have seen than at any time in our careers,” said the Speaker. At the same time, government bonds are the only asset that became even more expensive during the March rout. “How long can this continue?

The Speaker’s chart shows the net private funding requirement for the US, the Eurozone, Japan and the UK combined. That net private funding requirement is simply measured as the difference between the net supply of securities and the net asset purchases of the corresponding central banks. The idea is that if there is more (less) money seeking to flow into securities markets at prevailing prices than this number, then prices will tend to appreciate (depreciate).

The left chart assumes a budget deficit of 7 percent in the Eurozone and 10 percent in the US. The right chart assumes a budget deficit of 10 percent in the Eurozone and 15 percent in the US. In the former scenario, the net private funding requirement ends up near the lows from 2016-17, when the squeeze on risk assets was arguably at its strongest. However, in the latter scenario, the net funding requirement falls only slightly from last year and remains higher than for much of the last decade. The implication is that while $5 trillion is a staggering amount, it may not be enough this time to persuade investors to move out on the risk spectrum, raising question marks over the efficacy of the QE as a result.

The principal channel through which QE works is the sheer crowding out effect. Consequently, a lot of the QE in 2020 will not necessarily squeeze private investors out of existing Treasuries holdings. To a large extent, by stepping in as “buyers of last resort,” it will fund incremental supply from the government for which there might not have been enough demand.

From 2010 to 2018, changes in central bank asset purchases displayed a remarkable correlation to equities, commodities and credit. That may no longer prove to be the case. But one thing is clear, said the Speaker, the Fed is not out of ammunition. “They may just decide to buy stocks next.”

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