The US Federal Reserve is attempting to shrink its balance sheet (of previous purchases of US Treasury Notes and Bond as well as Agency Mortgage-backed Securities. Largely achieved by letting the assets mature.
And The Federal Reserve is the largest holder of US Treasury Notes and Bonds, but with a shrinking presence.
On the other hands, Central Banks like Bank of Japan, People’s Bank of China and the European Central Bank keep on increasing their balance sheets.
But let us focus on the ECB since it has several Brexit-exposed countries such as Germany, France and Italy. The ECB has dramatically increased its purchase of public sector securities.
Now, which countries are the beneficiaries of ECB purchases. Of course, Germany’s top economy with the largest zombie banks (like Deutsche Bank) is the leader, followed by France and then budget-challenged Italy.
Speaking of Deutsche Bank (my former employer), here is a chart showing that ECB purchases are seven times higher than net issuance. Not a sustainable trend by any means.
Only the most adventurous investors will touch Puerto Rican debt (technically municipal debt), Venezuelan or Argentinian debt. Or Turkey’s debt.
With 17 European countries with negative 2 year nominal yields (meaning negative REAL yields are well), along with Japan, what private investor wants to buy negative yield sovereign debt?
So, the US appears to be “The Last Man Standing” in the sovereign debt market. And even in the US debt market, both the 10-year and 2-year Treasury Notes are seeing large shorting activity.