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A poll of reserve managers from 77 central banks, entrusted with reserves worth $6tn last August, found a clear majority were changing their portfolio management strategy as a result — including taking steps such as buying riskier assets.
“Central banks need to preserve capital, so investing in securities that force them to lose money is counterintuitive,” said Christian Deseglise, head of central banks, sovereign wealth and public funds at HSBC. “They are needing to act more aggressively to generate yield and in some cases take more risk.”
While central banks are best known for setting interest rates and printing cash, overall they are among the biggest of investors. Total managed reserves were $10.9tn at the end of last year, according to the International Monetary Fund.
Now, according to the poll compiled by Central Banking Publications, a trade journal, and HSBC, the bank, central bank reserve managers are making or “seriously considering” buying bundles of loans repackaged as asset-backed securities or switching out of currencies affected by negative rates.
Institutions such as the European Central Bank and the Bank of Japan have deployed negative rates to counter the threat of a destabilising bout of deflation and help boost growth.
But the combination of negative rates and mass bond buying by central banks, or quantitative easing, has lowered the return on financial assets. Several government bonds and some high-grade corporate debt are now trading at negative yields, meaning investors who hold the assets until maturity stand to lose money.
“Reserve managers are part of the collateral damage from negative rates,” said John Nugée, founder of Laburnum Consulting and a former reserves manager at the Bank of England.
“They are having to operate with the world as it is and are stuck with the same problems as everyone else. But they are very well aware that there are a lot more important issues than the return on their reserves.” [...]
Eighty per cent of respondents in the poll said negative rates had affected central banks’ reserve management strategies. Almost 60 per cent said negative rates had affected their central bank. [...]
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