How will bond markets rebalance when central banks stop buying?

It is more than likely that the Federal Reserve and the ECB will eventually reduce then stop their bond purchases. This raises the question as to how the bond market will then rebalance. A first analysis examines the mechanisms that force certain economic agents to buy bonds in dollars or euros. This is the case of: Excess global savings, with regard to non-residents; Regulations, with regard to banks and institutional investors. The presence of these mechanisms may curb the rise in long-term interest rates that will result from the end of central banks’ bond purchases. A second analysis examines how bond markets rebalanced when central banks began their purchase programmes : who was the counterparty of central banks’ purchases, and how were interest rates and also exchange rates affected? Altogether: Non-residents and households, not institutional investors or banks, were the counterparties of central banks’ purchases. This is consistent with excess global savings and the regulations for financial intermediaries ; If we invert the trends observed in response to central banks’ purchases, an end to these purchases would lead in the United States and the euro zone to: Larger purchases by non-residents and households; Higher long-term interest rates; An appreciation of the euro against the dollar, as quantitative easing has no effect on the dollar’s exchange rate but does have an effect on that of the euro.