Markets ride US$1-trillion global liquidity wave

Largely thanks to the Bank of Japan hoovering up domestic government bonds to keep its ‘yield curve control’ policy intact, and stimulus from the People’s Bank of China , aggregate liquidity from the official sector has surged in recent months.

Led by the Federal Reserve, they are, broadly speaking, deeply mired in the battle against inflation: raising interest rates, draining liquidity via ‘quantitative tightening’, and talking tough by promising to raise rates further if need be. “We have this very unique situation where central banks around the world are trying to cool inflation, but the BOJ is holding onto ‘YCC,’” says Slok, chief economist and partner at Apollo.

The BOJ flow in January outstripped the combined liquidity drain from the Fed, European Central Bank and Bank of England, resulting in a G4 net liquidity provision of $115.3 billion.Pressure had been mounting on the BOJ for months to tweak its YCC policy of buying unlimited amounts of bonds to cap the 10-year yield at 0.25%. But it was still a shock when the BOJ announced on Dec. 20 that it would raise the cap to 0.50%.

King estimates that a $1 trillion swing in central bank liquidity is enough to push global equities up or down around 10%, add or subtract 50 basis points to investment grade credit and 200 basis points to high-yield spreads.

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