How Much Does Exported QE Matter? Spoiler Alert: A Lot

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On of the key themes of late is the extent to which the policy divergence between the Fed and the ECB/BoJ are putting a bid under US paper. As we showed you last week, Y/Y growth in the foreign demand for US corporate paper is growing at a double-digit pace and by Wells’ estimates foreigners now own 40% of the market: NIRP

On Monday, Goldman is out with a look at just how influential falling rates abroad have been on US Treasurys. As it turns out, quite influential. Here’s more:

“Since the end of 2013, when the Fed began to wind down quantitative easing (QE), US 10-year yields have nearly halved, primarily reflecting a decline in the term premium. Our prior research suggests that spillovers from monetary easing abroad have played a leading role; here we attempt to quantify those effects.”

“According to our estimates, spillovers from monetary easing in the Eurozone have had the largest effect on US rates. We estimate that the change in ECB rate expectations lowered the US term premium by 35bp, and that ECB QE subtracted an additional 20bp. Easing by the BOJ also created meaningful spillovers, reducing rates by about 30bp in total, with equal amounts coming from QE and rate expectations. Easing by the BOE subtracted 12bp from US rates. Altogether, our estimates suggest that G4 central bank easing can account for almost 100bp of the reduction in US 10-year yields since the end of 2013.”


(Chart: Goldman)

Right, 100bps. So damn near all of it:


There are now so many sell-feeding loops to this global monetary policy regime that it’s impossible to track of.

As Goldman concludes:

“We’re all in this together. A Fed rate hike later this year may boost longer-term rates moderately, but it seems unlikely to change the larger global forces weighing on bond yields.”

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