Another day, another debate about the effect central bank balance sheets will ultimately have on Treasury yields.

Last week we highlighted a pretty interesting piece from Bloomberg’s Cameron Crise who tested the extent to which Fed/ECB/BoJ balance sheets influence 10Y yields. Simply put, he found that their inclusion in a model that also counts core PCE inflation, the unemployment rate, the Fed funds rate, and Fed expectations seems to suggest that they don’t in fact matter as much as some folks think. As we noted at the time, that model probably suffered from a bit of chicken-egg-ing, but it was still a worthwhile exercise. Ultimately, Crise said his research suggested the market shouldn’t “believe the hype surrounding central bank balance sheets and Treasury yields.”

One thing to note when you hear this debate is that back in August of 2015 quite a few commentators started to ask whether China’s FX reserve liquidation (tied to Beijing’s attempts to control the pace of the yuan devaluation) would amount to QE in reverse and thereby serve to mute the effect of DM central bank asset purchases. Of course what China was doing wasn’t new. In many ways, Saudi Arabia’s move to kill the petrodollar in late 2014 marked the beginning of the end for the great EM FX reserve accumulation. There was quite a bit of global hand-ringing starting in early September 2015 about the “quantitative tightening” that China and Saudi Arabia had unleashed.

Now the debate outlined above centers on the Fed’s balance sheet (how quickly they’ll let it runoff) and on ECB tapering.

Read below as former FX trader Mark Cudmore weighs in with a less nuanced, but more straightforward assessment. Simply put, Cudmore notes what we said on Tuesday – namely that bears of any kind should be wary when central banks are (still) in the driver’s seat.

Via Bloomberg