The Short Supply of Assets

Fantastic chart and data here from Citi Research showing the issuance of various securities over the last 10 years in the Eurozone, US and Japan.  It’s interesting to note the surge in treasuries that has occurred since the collapse in the GSEs and the so-called AAA bubble in real estate.  It’s also interesting to note the decline in net issuance.  In other words, the supply of asset issuance continues to run at a level well below pre-crisis levels.  That might explain at least some of the broad upward pressure on assets in general.

Here’s more excellent commentary from Citi:

“The blue/grey bars quantify the net issuance of securities across broad asset classes on a rolling 4-quarter basis in the Eurozone, the US and in Japan. The orange bars capture the effects of central bank interventions. The red line is the net amount of issuance left after those interventions – in other words, it is a proxy for the change in the size of the universe of securities that investors can buy.

As you would expect, the chart shows a surge in net government debt issuance in 2009-10 as fiscal deficits ballooned. These have fallen back over the last couple of years but remain significantly higher than before the crisis.

The surge in corporate issuance of bonds since 2007 is perhaps less intuitive, considering that companies have generally run their balance sheets very conservatively, cutting capex and M&A. However, a big shift from loan to bond funding has more than compensated for that. Net equity issuance remains a relatively small component. There was a brief flurry of equity issuance in 2009-10, but as leverage has come down corporates have reverted to the more normal pattern of retiring shares on a net basis.

The biggest shift has been the drop in net issuance from financials and GSEs (like Fannie Mae and Freddie Mac). Having dominated securities markets before the crisis, their net issuance has dwindled to next to nothing in recent years.

Adding up the bars (still ignoring CB interventions in orange) shows that the growth in the investible universe has slowed from around $3.5-4tn annually before the crisis, to less than $2.5tn over the last couple of years. In other words, the rate of expansion of financial securities has slowed by more than $1tn. That’s a pretty penny, when you think about it.

When the effect of central bank interventions (quantitative easing and LTROs3) in orange is subtracted, the reduction in the supply of new assets available to financial investors becomes even more dramatic:

Apart from a brief period in H1 2011 (where markets incidentally did not perform particularly well), the investible universe of financial assets has grown by less than $2tr per year over the last three years – half the run-rate that we were used to. In fact, in some quarters net issuance of securities been virtually zero.  We think this ‘supply effect’ on financial markets of central bank interventions is widely underestimated.”




Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.
Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

More Posts - Website

Follow Me:


  1. Central banks could use short-term debt certificates (instead of Interest On Excess Reserves/Fed and fixed-term deposits/ECB) to sterilize their asset purchases. That would maintain the supply of safe assets while increasing the available short-term paper. It should help support short-term rates (and not allow them to fall below zero) while in the case of the ECB SMP portfolio it would become a mechanism of ‘collateral upgrade’ by the central bank of periphery debt and stabilize government debt markets.

  2. Well dude, the answer is simple. You just pass these financial assets back and forth among financial managers and each pays a little more for it every time it changes hands. This is called ‘financial innovation’. Perhaps you could securitize them and maybe even do some tranches. This will attract the big money. If you can get them passed around fast enough, the price will rise every time they change hands and people will borrow money to buy them because of the high demand. Then people on the sidelines can bet on the price movement of these new, amazing financial assets. You just aren’t’ thinking right. You don’t have a problem. You have the genesis of financial innovation.

  3. Good post. The focus of QE discussions shouldn’t be about the “scary” growth of Central Bank balance sheets. It should be about the opposite, i.e. the withdrawal of safe assets from the Private Sector.

  4. You see a problem. I see an opportunity. Pre-2007, real estate became a popular item because the big claim was “they’re not making anymore.” Look how much people made by taking that observation and applying a little financial innovation. This is another opportunity to take a limited resource and expand the market by advertising its scarcity. It’s only OPM. no worries.

  5. That’s an interesting study. Citi’s focus on Eurozone, US, and Japan makes the thrust of their hypothesis (short supply = higher prices) less significant though. For example, their logic skirts emerging markets, where issuance has been strong and prices have also risen since 2008.

    I mean, it’s a cool chart graphic, but it’s not as reliable with such a narrow universe, given fluid global capital flows.

  6. Yeah, I should have mentioned her work here. That’s my fault. They’ve been on top of this for years now….Awesome stuff as always from the FTAV crew.

  7. What do you think of the “point by point” argument that she develops ? I’m not able to follow it exactly from safe assets shortage to technological deflation.

    Is the safe asset shortage some kind of redefinition of the old school liquidity trap ?

    Thinks Cullen!

  8. Back in those days, the world was supposedly awash in liquidity, which those MBS and various derivatives were invented to sop up.
    Same thing today — if you are saying there is an ‘asset shortage’ you are really saying there is a surplus of money (deposits created by loans, right?.)
    Considering that the average American is dead broke, overtaxed and starving for public services, that is saying a lot.
    I can’t help but conclude that the whole money creation process is sowing the seeds of its own destruction.

  9. Correct me if I’m wrong. My takeaway: we should see a continued bond bull market because the total world bond market isn’t growing fast enough to keep up with the likely demand as world economy grows. This also supports a bullish stock market especially for the more conservative and defensive sectors which are closer to being “bond-like” and less volatile.

  10. Interesting to compare effect of bond issuance in US vs. Japan. Us bonds have a significant share bought by foreigners. Japan bonds almost all bought domestically. So Japan sells lots more low interest bonds without the same effect as the US. Why?

  11. The significantly lower interest rates on Japan’s gov’t bonds may be due to the fact that Japan’s Central Bank started their ZIRP (zero interest rate policy) at least 10 or more years before the US started theirs. Perhaps the longer the period of ZIRP, the lower the interest rates. If that’s true, then even lower rates could be coming to US’s T-bonds.

  12. I’m thinking this rally will continue until people start holding cash, which we could see soon because of seasonality, Less likely reasons are increased NFA issuance and business investments. The current price structure has much to do with an expectation of low growth and inflation. Last quarter GDP missed by ,5% and the first four weeks this quarter flat,expectation 1,5%, so this quarter set to underperform. My longs and shorts are roughly equal and cash is about 40%, Good short opportunities include miners of all types and heavily extended smaller companies.

  13. Cullen, I’ve seen you write, in response to someone claiming that QE is causing asset prices to rise, that Treasury continues to auction more bonds, thus there’s not necessarily a shortage of bonds. Does this post represent a change in your thinking on this matter?

  14. Does the ever increasing shortage of assets explain why stock market volumes have been steadily declining ever since the crash? That without new issuance and lots of buybacks and mergers, there is simply less stock to be traded?

  15. Me too – he generally says its an asset swap and basically a psychological ploy so what CBs do should be relatively irrelevent other than on mindset.