The ECB shed €95 billion of QE Bonds & Loans in Q3. Since mid-2022, QE assets dropped by 53%! Gold got marked up to market.
By Wolf Richter for WOLF STREET.
Despite surging yields of government bonds in the Euro Area, the ECB shed €95 billion ($106 billion) of its QE bonds and loans in Q3, bringing them down to €3.37 trillion. Since the peak of those QE assets in mid-2022, the ECB has now shed 53%, or €3.79 trillion ($4.25 trillion), of its QE assets.
Let that sink in for a moment. This is an extreme turn for a central bank that had been uber-dovish for over a decade, with negative interest rates and “whatever it takes” QE – the immortal phrase of then ECB president Mario Draghi in 2012 – that lasted from the Euro Debt Crisis through 2022.
Shedding 53% of its QE assets is far more than anyone thought the erstwhile uber-dovish ECB, or any other central bank, could ever shed. The ECB has cleared out nearly all of its mega-sized pandemic-QE!
The bond market has been on its own, slowly re-learning what a bond market is supposed to do, which, it turns out, is not to provide unlimited free private-sector money to governments to fund their ballooning deficits, but to price the risks of inflation, default, and other issues, while funding governments and providing adequate returns for bondholders who take those risks.
Government bond yields have surged since central banks began to reverse QE and hike their policy rates – even the Bank of Japan flipped from QE and Yield Curve Control to QT and has shed 17% of its assets. The threat is a surge of inflation, and for Japan, it’s also the collapse of the yen.
The ECB also re-hiked its policy rates twice by 25 basis points each time, first on June 11 and then again on September 10, lifting its main deposit rate to 2.50%.
By continuing with the balance sheet reduction, and by hiking its policy rates, the ECB is pursuing a clear tightening strategy.
The ECB’s two QE assets: Loans and bonds.
The ECB’s QE consisted of two methods, loans and bonds. Combined, they ballooned from €440 billion in 2012 when Draghi still reigned over the ECB, to €7.16 trillion by mid-2022 at the peak.
The bonds that the ECB acquired during QE were mostly government bonds from the member states, but also included corporate bonds, mortgage bonds, and asset-backed securities that the ECB bought under various programs.
Since mid-2022, when QT began, the ECB:
- Shed 98% of all its loans, bringing them down from €2.2 trillion at the peak to $38 billion (blue in the chart below).
- Shed 33% of its bonds, from €4.96 trillion at the peak to €3.33 trillion now. Bonds come off the balance sheet when they mature and the ECB gets its money back (red).
The ECB has exited the bond market. And nothing bad has happened. Yields have risen back into the pre-QE normal range, and that’s where they should be in a normal bond market. Despite all the brouhaha in France and the hand-wringing about the French 10-year yield, it’s still below 5%. It’s just that everyone misses the free money.
The ECB marked up its gold holdings.
The consolidated balance sheet represents the combined assets, liabilities, and capital of the individual central banks of the Euro Area’s member countries. The German Bundesbank is by far the largest, and also has the largest gold holdings, which account for about 31% of the ECB’s gold and gold receivables.
The ECB marks gold holdings to market prices at the end of every quarter, a somewhat unusual practice among central banks.
On today’s balance sheet, which reflects the value of gold as of September 30, the ECB wrote up its gold holdings by €53 billion, to €1.29 trillion, as the price of gold rose in the July through September period.
In Q2, the ECB had written down its gold holdings by $160 billion, as the price of gold had dropped in the April through June period.
These mark-to-market adjustments are paper adjustments after the end of the quarter and do not involve purchases or sales of gold, money printing, QE or QT. They simply reflect variations in the market price of gold. Neither the Fed nor the BOJ mark their gold and gold receivables to market.
All combined, total assets dropped by €35 billion in Q3, after the €53 billion mark-to-market write-up of its gold holdings, to €5.95 trillion. Without the mark-to-market accounting adjustment of gold, total assets dropped by €88 billion.
In terms of total assets, the huge mark-to-market write-up of its gold in prior years, especially when gold prices exploded in 2025 and Q1 2026, masked a substantial portion of the magnitude of QT. The up-jags in 2025 and 2026 were the effects to the mark-to-market accounting write-ups of gold, amid massive gold price increases, overpowering the amount of the QT runoff.
And in case you missed it: Thoughts on the 10-Year Treasury Auction’s 5.30% Yield, Highest since 2000: It Created Demand, Bond Bloodbath Continued
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Great articles!
What the consolidated figures of the ECB system don’t show are the amounts which individual member banks owe each other through the T2 Settlement System (formerly Target2) because the claims/liabilities wash out in consolidation. Not surprisingly, the Bundesbank is the giant among those who have claims against the ECB with about €1.1 trillion. Luxembourg and Belgium follow with €200 and €100 billion, respectively, and the rest is peanuts. Among those who have liabilities to the ECB, Spain is the largest with about €450 billion, followed by Italy (€345B) and France (€180B). These claims/liabilities are essentially irrelevant as long as the Euro-System stays together but they do reflect the flow of funds within the ECB-system.
Interesting that the creditor nations would stand for this arrangement, and when do they call a halt or a reversal?
The “arrangement”, as you call it (TARGET2), is a payment mechanism, established under the Statute of the European System of Central Banks and of the European Central Bank, and it operates fundamentally as a daily cash management framework. Because it is a routine operational function, TARGET2 received minimal attention from senior policymakers during the Eurosystem’s first decade.
That perception shifted in 2011 when German economist Hans-Werner Sinn examined Germany’s potential financial exposure during the peak of the Greek sovereign debt crisis. Sinn identified €324 billion in Bundesbank assets categorized as “claims against the ECB under TARGET2,” with over half linked to balance-of-payments imbalances with Greece. Crucially, national central banks exercise no discretionary control over these positions; net cross-border outflows automatically expand a country’s liability to the ECB. This facility enabled Greece to sustain its current account deficit following its loss of market credit access in early 2010, effectively funding trade imbalances through the central banking network.
While European economists continue to debate whether TARGET2 positions constitute formal debt or liquidity support, these distinctions become critical primarily in the event of Eurozone restructuring or exit scenarios. According to Sinn, and in contrast to the Eurosystem, the U.S. Federal Reserve mandates annual interdistrict balance settlements using Treasury securities. Today, with Bundesbank TARGET2 claims approaching €1.2 trillion, the valuation and potential recovery of these positions represent a central structural risk for Germany in any dissolution scenario. Should the Eurosystem fall apart in an uncontrolled way, the Bundesbank would probably discover that no one feels responsible for honoring those claims.
Thank you for the insights. The ECB and the Euro are very unusual in the world of macroeconomics.
The German perception of having their assets at risk probably contributes to their unwillingness to print Euros to bail out their profligate neighbors.
1. I heard in NPR that Pepsi is increasing prices to OFFSET HIGHER PRICES. How that will work?
2. White house is preparing for new strikes on Iran to reduce oil prices.
3. I honestly do not understand, how these moves will reduce prices. Am I wrong?
I know one thing that will reduce the price of Pepsi: stop drinking it. Everyone. Same with all pops. Let the CEO drink the entire production.
I know you know this. Pepsi and Coke are not just simple soda pop and chips manufacturer. They control the Agribusiness and food not only in US but almost the world. If they are raising prices, all food and even water bottle will follow.
Hah, makes me think of that video of the McDonalds CEO pretending to eat their burger.
Not too much wrong with fizzy drinks with sugar, consumed sensibly. Sadly sugar and sensible consumption mostly left the building years back.
I expect at this point 90% of all their revenue is just fizzy water with artificial sweeteners… sorry I mean super sweeteners…
Fantastic piece, Wolf. Many thanks.
The Fed can learn a lot from ECB’s example.
Might be a loaded question, but why might it be that things in the EU haven’t “broke” with such relatively significant QT in such short time frame? The first chart is jaw dropping. In my opinion, beautiful to see.
Second question regarding “The ECB marks gold holdings to market prices at the end of every quarter, a somewhat unusual practice among central banks.”
What is the utility of this practice? Is it a publicity thing, or makes something easier to explain to the public? Is it to try and anchor its balance sheet a bit more to gold prices visually and publicly?
In theory the broader policy of transparency gives market participants more confidence and more data to work with, and is part of why EU states have some of the lowest borrowing costs in the Western world.
I think the biggest reasons why Euro-government bonds have lower yields then US treasuries, is firstly because of lower deficits, and secondly, because of lower inflation.
Though energy costs will probably push inflation higher in the eurozone, too. As the labour market is much more inflexible compared to the US, the “inflation-spiral” is much slower.
AI Bubble Risks Worst Stock Crash Since ’08, Strategist Says…
Rising Rates Eroding Value of Even Most High-Flying Tech Stocks…
Not sure how much eroding is happening. Nvidia and Mag 7 hit record all-time-high on Tuesday.
Those are just 2 stocks. Most stocks are down significantly this year.
Nasdaq and S&P500 hit all time high this week.
All these analysts say “may” or “could”. Anybody can say “may” or “could” to a particular event. What the analyst needs to give is the probability of that event occurring. Is the chance of AI crash 1%, 10%, 100% in a particular time frame or what? And show how that assessment was arrived at. “May” or “could” is just plain worthless.
A lean and “mean” EU can now squander a few tril on rearming to attack Russia. Good luck with that plan. Might want to secure some “secure” energy sources first. The deflation in drones is a real game changer. Three Houthis with a Toyota PU can a few boxes of drones can take down a pipeline, a tanker, an airport, a refinery, ad nauseum.
Meanwhile LNG continues to surge ever higher in the EU.
“If Russia invades — that means tanks or troops crossing the border of Ukraine — then there will be no longer a Nord Stream 2. We will bring an end to it.” Biden said while standing next to the new chancellor of Germany, Olaf Scholz, at a White House news conference.
How’s that policy working out for everybody these days?
“Trump-class Battleships: President Trump approved the initial construction of two new 30,000-ton Trump-class battleships (led by the USS Defiant), part of a broader “Golden Fleet” initiative aiming for 20 to 25 total vessels”
I’m sure Pete’s got it handled.
I would not even be surprised if they actually gold-plate those ships.
Those are weapons for wars long past, not current conflicts. The current administration is one of the most unqualified military staffs to hold that office ever.
The Germans are returning to their superpower as Chinese EVs invade the EU market, making some of the finest military arms the world has seen.
Weird you have the perspective that Russia is the victim in that war. What we’re really seeing, both abroad and at home, is a democratization of “good enough” air, sea, and land power, reducing the edge of militaries that have high-cost / high-value military platforms against low-cost / medium value military platforms in conventional war. That’s not a good or bad thing! It’s just a thing that the world and strategic planners will have to figure out. It’s significant that both of the Cold War era superpowers, Russia and the US, ran into significant problems in the wars they initiated.
Weird that Germany will be building armaments that are vulnerable to guys driving around in a hatchback with a deadly drone in the back.
Yea, the European NATO states would be wise to invest like the Ukrainians have learned to invest. Tanks, aircraft carriers, attack helicopters… all obsolete.
But at the same time, they have to not plan to fight the last war – like France did after WW1. Like mechanization, drone warfare could look a lot different 10-15 years from now, when the drones are AI-controlled, and hunted by other drones.
Historical rates sound great in theory, but rates don’t live in a vacuum. A 5-8% yield in the 90s hit a lean balance sheet and a government heading toward a surplus. A 5% yield today hits a $40T+ national debt pile. It’s not that the market “can’t handle normal rates”- it’s that the debt mountain wasn’t there last time rates were this high. No way possible this market can absorb 6% rates regardless of what normai used to be.
People (you?) said the same stuff when the 10-year yield hit 4%; it’s going to break everything. No way the government can afford….
The average interest rate on the US debt is about 3.5% now, and it’s climbing slowly. Why? Because long-term notes and bonds don’t mature for years, and aren’t replaced until they mature with new higher-rate notes and bonds. The 30-year 1% bonds issued in 2020 won’t mature until 2050… that 1% money will last till 2050!. It takes a very long time for new rates to push up the average rate… years and decades.
I guess we’ll find out soon enough!
Look at “Federal Outlays: Interest as Percentage of Gross Domestic Product”
Source:
fred.stlouisfed.org/series/FYOIGDA188S
1991 value: 3.15%
2026 value: 3.15%
This is why buying bonds at today’s yields might not be a bad idea. Yields plummeted after ’91, even after Ross Perot lectured us about the imminent danger.
Uncle Sam needs to up his Vig if he wants my money.
You bond vigilante you!
🤣❤️
Wolf, in the past you’ve commented on the “floor” for the Fed’s assets, due to currency in circulation, etc.
Where do you think the floor is for the ECB?
I don’t know. I don’t dissect their balance sheet that carefully. Their bank notes in circulation are only €1.6 trillion. There are some other liabilities that need to be there. So the minimum is going to be maybe between €2 trillion and €3 trillion.
I think they can get rid of all their QE bonds (€3.3 trillion) and not have a problem. This will take many years, it’s a slow process, and everyone can learn how to deal with it. If that pushes the limits, their repo facility will be used more often and with bigger balances. That’s how central banks used to do it before QE.
Great job as always, Wolf.
Of course I’m kidding, but the typo substituting JPY symbol for USD in your comment, might be considered by some as a Freudian slip.
Keep up the great analysis. This is why I have you on AutoPay.
Objective analysis not available anywhere else, IMHO.
Thank you, –Geezer
What I actually did in my comment was switch out the € symbol and replace it with the ¥ symbol to see if anyone pays attention 🤣
I now flipped them back.
thanks.
Isn’t all that glitters held by the federal government valued @ around 1% of its actual current spot price by the USA?
They are using $42/oz in the old original dollars (well, half-dollars really). Not the new confetti 1-cent dollars.
Gold wasn’t worth $42/oz, even when it was “worth” $42/oz, as became apparent the moment Bretton Woods ended and the price quadrupled.
Gold merely became just another highly volatile and unstable commodity back then in 1971 pretty much like crapto is today.
SoCalBeachDude,
Why do central banks hold gold? Why not say aluminum, or potash? Storage fees?
Andy to answer your question – because you can’t asset freeze gold reserves, and because it’s shiny and chicks dig it so there is always demand…at least until we do space mining to flood the market.
People used to use diamonds to store wealth. Used to. Now they have lost a big chunk of their wealth.
$42.42 in today’s dollars for one ounce of gold is still very significantly overpriced by any reasonable measure.
It will probably overshoot on the way down to like $35ish. Then we pounce.
Yet after the dozer goes through the house is dust and the gold is fine
Wolf, serious question – do you think the worldwide bond (government debt) situation will spiral out of control? Will it elevate to crisis levels? It seems like there is negative bond news on a weekly basis.
No, but yields will and do make sense again for the first time in over 20 years.
Assuming that people start paying attention to yields when they’re 30 at the earliest: If you’re less than 50 years old today, you probably have no idea what normal yields are, you’ve never seen them because you were too young to see them. It’s been a long time.
I agree that yields being normal again is a good thing, however I do think that governments might have some crises concerning their wild deficit spending in the years ahead. A very sharp spike in yields like what happened at the beginning of the ’80s is one thing that might spark off a crisis. So far that has not happened – but yields have been rising pretty steadily, and governments in the West have not exactly started acting responsibly.
Yes, the ECB is on the right track, I hope I never see a pitiful likeness of Draghi on the bank’s board again
U.S. Budget Deficit Jumps $2 Trillion…
Wasn’t Draghi a big fan at the time because it was keeping Italy solvent?
Obviously contagion risk may have seen anyone else do the same, eventually, but notice how the ECB didn’t do a Greece or Cyprus.
Question:
Are Central Banks losing their control, or at least some of it?
It seems the markets themselves are leading and the Central Bankers are forced to follow.
Central banks are encouraging the bond markets to apply some discipline to governments. No one else can do that. Only the bond market can.
Trump weighs unleashing fresh strikes on Iran BEFORE midterms – sending oil prices skyrocketing
The White House has asked the Pentagon to draw up options for fresh strikes on Iran that could be launched before next month’s midterms.
For Capitalist Oligarchs an arms length market and proper accounting is as abhorrent to them as a parasite feels getting pried off the host. This failure to mark gold to market occurs when there is a army of minions to calculate and track it; therefore, there is some kind of oligarch scheme that is profiting.
“the ECB shed €95 billion ($106 billion) of its QE bonds and loans in Q3, bringing them down to €3.37 trillion. Since the peak of those QE assets in mid-2022, the ECB has now shed 53%, or €3.79 trillion ($4.25 trillion), of its QE assets.”
Wolf, do you think these massive sales of bonds might have contributed to pushing down European bond prices and thereby pushed up the yields?
I.e. is this enough fresh supply being dumped on the market every day that eventually the demand couldn’t keep up in the Eurozone market, which I assume has much less liquidity than the US or Japanese markets?
If the ECB draws a conclusion like this, we might see an end to their QT experimentation, and more reliance on raising short-term yields to control inflation. If KevWar draws the same conclusion in the U.S, his plans to shrink the Fed’s balance sheet might never happen.
Eurobonds are still much lower than US bonds. And that despite having lower growth. It would be a folly to try to supress those yields even more.
There are a loooot of savings in europe and they can absorb, via banks through one instrument or another, a lot of bonds.
Companies will see their rate increased, first, because there is finally a bit of yield from gov bonds. But those premiums are still low imo.
The average mortgage rate is over 50% below the US at around 3.4%
Countries like Spain , Portugal , Bulgaria and Malta all are below 3%
But the EU and the Euro now have problems due to younger people now taking to the streets and rioting , to get better equipment in classrooms , more teachers , longer luchbreaks , shorter lessons and better rooms to work in with heating and aircon .
This has spread from France to Belgium and now Spain , so which country will be next and when will the US also be involved ?
Plus when will students bring into the demands the scrapping of student debts which effectively makes them slaves to the state for 30 to 40 years so for life.
Add this problem to rising mortgage rates to over 8% in early 2027 and 9% by the end of 2027 and further QT looks highly unlikely in the face of massive foreclosure rates and banks taking hits once again.
More QE can’t be ruled out in the face of a major US housing crash
It’s a simple report but noteworthy. I had been looking at QE all the time for it to end. Im under 5 and live in €. And I didn’t know this. Like I was rofessionally distracted.
Thing is, QE was to stop deflation. So QT should halt inflation. While govts. want to burn the debts. Given it is no ecomic boom time, this is wat profiting. Funding wars through 30 y bonds.
Russia sold that gold?
What exactly is a “gold receivable” ? Warehouse receipt?
The account “Gold and gold receivables” includes:
1. Gold = Physical gold bullion and coins held in vaults by the ECB or national central banks within the Euro System.
2. Gold Receivables = claims or entitlements to gold, such as gold deposits or claims to gold (the legal title or right to claim the delivery of physical gold from the custodian, functioning similarly to an account denominated in gold)
This may be off topic, but how is it possible or rational that the Greek 10 year bond rate is nearly a % lower than the U.S. Treasury 10 year?
Or do I have the rates wrong…?
“Rational?”
It’s obviously too low, as is the French 10-year yield. But “rational” is not something I expect from financial markets, or else there would be no crypto, prediction markets, and AI investment bubble, which are incomparably more irrational than overpaying a little for Greek euro bonds.
The Greeks now have a more responsible government than the U.S. and realistic prospects to service their debts for the next decade or two. That explains why they are deemed more creditworthy by rational investors. The experience of deep depression and austerity made them change their behavior. The U.S. still has a “Greek experience” ahead.
Separating the ECB’s gold revaluation from QT is sensible, since a higher recorded asset value does not imply new money entering markets. Assessing liquidity would also require examining how readily those assets could be sold.
Yea, I was wishing for a chart showing the balance sheet not adjusted for the market price of gold.
Don’t get me wrong, I appreciate the ECB’s extra transparency, but the market movements can obscure what’s going on with the money supply.