Another way to look at the QE wind-down is
on a flows basis, or change in the rate of
purchases. Looking at global 12-month rolling
flows (combining Fed, ECB and Bank of Japan
flows), there have been two previous balance
sheet wind-downs; in 2014 and in 2015 flows
declined without much market volatility.
Fed flows declined continuously for two years starting
mid-2014 and markets took it largely in stride. A
sanguine investor may ask why the 2018 wind-
down will prove any different.
One key diference is that a few years ago,
tapering by the Fed was largely consistent with
the reduction in government issuance. In fact,
treasury purchases never exceeded net issuance
in any 12-month period.
In Europe and Japan, QE
has been proportionately far larger. In 2017, ECB
and Bank of Japan government bond purchases
peaked at seven and three times larger than their
respective net issuance respectively.