On the March 2, 2022 interest rate announcement, the Bank of Canada stated:
The policy rate is the Bank’s primary monetary policy instrument. As the economy continues to expand and inflation pressures remain elevated, the Governing Council expects interest rates will need to rise further. The Governing Council will also be considering when to end the reinvestment phase and allow its holdings of Government of Canada bonds to begin to shrink. The resulting quantitative tightening (QT) would complement increases in the policy interest rate. The timing and pace of further increases in the policy rate, and the start of QT, will be guided by the Bank’s ongoing assessment of the economy and its commitment to achieving the 2% inflation target.
My guess is that the April 13 announcement will involve a 1/4 point increase, coupled with some QT.
As of today, the Bank of Canada has $431 billion in securities (422 billion in government debt and 9 billion in mortgage securities) to work off their balance sheet. I very much doubt they will get that far.
Right now, they are in the reinvestment stage – as maturities arrive, proceeds are invested in other treasury securities. You can view the results of such actions here.
The term structure of their debt is skewed short – the median term is 4 years.
Bank of Canada government debt holdings by maturity
April 3, 2022| Year | Par (millions) |
|---|---|
| 2022 | $56,945 |
| 2023 | $88,549 |
| 2024 | $53,992 |
| 2025 | $43,082 |
| 2026 | $37,035 |
| 2027 | $12,843 |
| 2028 | $8,435 |
| 2029 | $12,760 |
| 2030 | $34,309 |
| 2031 | $14,635 |
| 2032 | $340 |
| 2033 | $5,075 |
| 2034 | $- |
| 2035 | $- |
| 2036 | $440 |
| 2037 | $7,645 |
| 2038 | $- |
| 2039 | $- |
| 2040 | $- |
| 2041 | $7,309 |
| 2042 | $- |
| 2043 | $- |
| 2044 | $425 |
| 2045 | $8,911 |
| 2046 | $- |
| 2047 | $393 |
| 2048 | $6,371 |
| 2049 | $- |
| 2050 | $76 |
| 2051 | $17,947 |
| 2052 | $- |
| 2053 | $2,801 |
| 2054 | $- |
| 2055 | $- |
| 2056 | $- |
| 2057 | $- |
| 2058 | $- |
| 2059 | $- |
| 2060 | $- |
| 2061 | $- |
| 2062 | $- |
| 2063 | $- |
| 2064 | $2,128 |
What is likely to happen is that the Bank of Canada will prescribe an amount to be bled off the balance sheet and then as debt securities come up for maturity, the reinvestment will be at a lower amount.
When QE ended (October 27, 2021), the Bank of Canada was purchasing $2 billion in incremental debt per week. It was as high as $4 billion per week during the Covid crisis in 2020. I suspect the wind-down will be at a pace of $2 billion a week.
The effect of QT should be the overall rising of interest rates across the yield curve as the Bank of Canada will be picking up less of the government debt market – this slack will have to be picked up by the external markets. We have already seen a significant rise up in the yield curve – for example, the 5-year rate has risen from 1.25% at the end of 2021 to about 2.50% today. The rise in interest rates has an equivalent impact on the discounted rates of assets (i.e. assets with future-dated cash flows will trade lower all things being equal). Also, note the US Federal Reserve will likely engage in their own form of QT soon (likely early May), this will create an ever-tightening monetary climate. There is still plenty of excess liquidity out there in the system, but over time this will be shrinking. Be cautious.