The RBS economics team did a good summing-up on Friday:
In the week so far of intervention in Italy and Spain, the ECB Securities Market Program has cost somewhere between Eur 11-16bn on our estimates. The daily bond buying targeted the 2y-10y BTP and SPGB paper and (allegedly) CCTs [floating rate bonds], with marginal buying of Irish, Greek and Portuguese papers. The buying of CCTs is especially interesting. This market segment was looking cheap against the intervention in BTPs and is largely a domestic market which should be expected to maintain exposure well above non-residents. The ECB therefore looks to be changing tactics. Why? One answer is that Italy is not in a EU/IMF funding programme and so it could make life difficult if the ECB does not buy certain market segments as Italy can not just issue in 3y,5y and 10y buckets. It could also be a signal to markets that the ECB is committed to aggressive intervention.
It’s a “change in tactics” in so far as napalm is a change in tactics in a forest counterinsurgency. It works. In a way. It’s very interesting that RBS are cautious on trades that might be blown up by the ECB buying BTPs beyond 10 years, or buying zero-coupon bonds versus BTPs, such as 10-30 year yield curve steepeners. It’s noteworthy that if the ECB did flatten the long end of the curve, that might make it easier for Italy to extend the maturity of new issuance, but generally the idea seems to be that the ECB will buy anything. But will it buy everything?
RBS note that the central bank seems to be yield-targeting:
Overall, ECB attempts look fruitful at first glance, assuming that ECB has targeted a stable 10yr yields around 5% for Spanish and Italian papers. The 10y Spanish and Italian yield dropped from 6.28% and 6.20% (COB on Thursday before rumours spread in Friday) to below 5.1% (COB yesterday). Note however that the ECB has not been successful if the intention was to restore confidence to the broader economy. This is especially evident in the lacklustre performance of Spanish and Italian bank debt and equity…
That’s kind of questionable if the ECB is only supposed to be doing a liquidity support operation, one that encourages investors to return rather than giving them an exit point at a specified yield. On the other hand an obvious target could give ammunition to anyone in markets brave enough to face off against the ECB directly. Assuming that the central bank will only commit so much time and resources to Italy purchases, whether because of the emphasis on sterilisation, or the transition to the EFSF, or because the ECB holding too much Italian debt will destroy the original investor base — well, someone might at least try.
Quite a week, wasn’t it? And we haven’t even gone into CDS basis…
Related link:
ECB buys, but can sovereigns return? – IFR