Bond purchases by banks and hedge funds have dampened the effects of the Riksbank's quantitative tightening
News The Riksbank's quantitative tightening has so far had limited effects on risk premia and bank deposits. One reason for this, according to a new analysis by Erik Andersson and Peter Kaplan at the Riksbank, is that much of the reduction in the Riksbank's bond holdings has been absorbed by banks and by investors - including hedge funds - who have financed the purchases with bank loans.
When the Riksbank initiated quantitative tightening in 2022 and started to reduce the large bond holdings built up to stimulate the economy, not least during the pandemic, this was expected to have a tightening effect on financial conditions. As the liquidity surplus in the banking system would then decline, bank deposits were also expected to fall and bond risk premia to rise. So far, however, deposits have been stable and risk premia have not increased significantly.
According to the authors, Erik Andersson of the Financial Stability Department and Peter Kaplan of the Monetary Policy Department, one explanation is that much of the reduction in the Riksbank's bond holdings has been bought by the banks themselves and by leveraged players such as hedge funds. The fact that these investors have been active during this period has dampened the impact on both deposits and risk premia.
If hedge funds find it more difficult to finance themselves in the future, some of their holdings may need to be absorbed by other investors demanding higher returns. This could lead to increased risk premia and reduced bank deposits. The recent rise in repo market rates suggests that hedge funds' funding conditions have deteriorated.