Eurozone QE bond buying passes €1tn mark

Posted on September 5, 2016

The Euro-logo is projected onto the main building of the European Central Bank, ECB during a rehearsal of the "Luminale" in Frankfurt/Main, Germany, on March 12, 2016. The light festival "luminale" runs from March 13 to 18, 2016. / AFP / DANIEL ROLAND (Photo credit should read DANIEL ROLAND/AFP/Getty Images)©AFP

The European Central Bank has passed the €1tn mark for its controversial purchases of government bonds, putting pressure on policymakers to address the scarcity of available assets when they meet in Frankfurt this week.

A global collapse in eurozone bond yields since Britain’s vote to exit the EU has dramatically reduced the stock of eurozone government paper standing above the yield threshold set for the ECB’s €1.7tn bond-buying project — raising concern that the ECB will have to make sweeping changes to avoid running out of bonds to buy.

    The bond purchases are part of a quantitative easing programme, like those of Japan and the UK, launched 18 months ago to fight the threat of deflation and boost the flagging eurozone economy by driving down borrowing costs for companies and lifting confidence.

    In Germany, where the yield on 10-year German Bunds has fallen below zero for the first time in history, bankers at Citigroup estimate that the country’s entire government bond market will become ineligible for the ECB’s bond-buying scheme by November.

    “There are various estimates of when the ECB will hit a wall because it does not provide exact breakdowns of the bonds it already owns — but everyone agrees that it is close to reaching its limit,” said Aman Bansal, interest rate strategist at Citi. “And the bank cannot slow the pace of bond purchases without sending out a signal to the markets that something is wrong.”

    The ECB’s bond-buying operation is run by a small group located on the seventh floor of the central bank’s Frankfurt headquarters, joined by teams in central banks across the monetary union, of which Germany’s Bundesbank — located a few miles to the north-west of the ECB’s building — is responsible for buying the most bonds.

    The programme, launched in March 2015, hit the €1tn mark on September 1, reaching €1.002tn at the end of last week. That is equivalent to around one-seventh of the entire universe of eurozone government and agency bonds according to figures from Dutch bank Rabobank.

    News that the ECB last week surpassed the €1tn mark for its government bond purchases comes as the bank’s governing council prepares to meet this week amid doubts that its policies have done enough to lift the region’s economy.

    This has now become a question of credibility. The [ECB] meeting is an opportunity to communicate . . . new intentions to the market

    – Franck Dixmier, Allianz Global Investors

    While the halfway point for the €1.7tn programme has now been passed, inflation remains virtually non-existent. The latest figure from Eurostat, the European Commission’s statistics bureau, showed prices rose by 0.2 per cent in the year to August — well below the ECB’s inflation target of just under 2 per cent.

    “This has now become a question of credibility,” said Franck Dixmier, global head of fixed income at Allianz Global Investors. “The [ECB] meeting is an opportunity to communicate new macroeconomic projections and new intentions to the market.”

    However, analysts are split on whether the eurozone’s monetary guardians will support an extension of the QE programme beyond next spring as soon as Thursday.

    The ECB has so far said it will buy €80bn a month of mostly government bonds until at least March 2017. While it is widely expected that the eurozone’s central bankers will remain active in the single currency area’s bond markets beyond that date, policymakers could wait until later in the year to commit themselves to buying bonds for longer. However, credit analysts at RBC say no action will be regarded by markets as negative.

    One explanation for a possible delay is that any extension in the QE programme is likely to come with a loosening of terms that dictate what central bankers can buy.

    At the moment, the ECB imposes limits on the amount of a particular bond central bankers can purchase, as well as restrictions on the total proportion of a country’s debt that it can own. It will also not buy bonds yielding below minus 0.4 per cent and purchases member states’ debt in proportion to the ECB’s capital key, which roughly equates to the size of national economies.

    According to Richard McGuire, fixed-income strategist at Rabobank, the only change that will have a significant impact is lowering the floor on the yields at which the ECB will buy bonds. “Anything else will be tinkering round the edges,” he said.

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