Update 1435 UK time: The number’s in and it’s €22bn, which takes the total for all ECB bond purchases to €96bn. Again, watch those sterilisation numbers (bid rate, total size of bid, etc). Related fact du jour — the ECB liquidity surplus currently stands at €160bn based on the lending operations that took place in August, according to Barclays Capital. At its biggest in over a year.
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Number du jour (probably of the week) will be the total for last week’s ECB buying in Italian and Spanish bonds.
We’ve heard estimates ranging from €10bn to €15bn. (The total’s €74bn currently.) Just as well really. Gary Jenkins of Evolution Securities is reading a lot into the semantics of the difference:
It is worth reminding ourselves that when the ECB started the Securities Markets Programme (SMP) it bought €16.5bn in the first week and €10bn in the second week in an attempt to stabilize the Greek debt market. To prove its commitment to supporting the larger Spanish and Italian markets we would expect the ECB interventions that settled last week to be of a similar magnitude to the initial SMP purchases. Anything under the €10bn mark is likely to disappoint and question the ECB’s commitment; more than €15bn could be seen as the ECB applying a shock-and-awe tactic and give a further boost to the market. Spain and Italy between them are expected to come to the market for over €100bn of medium to long term funding for the rest of this year which could mean official support for the markets may have to be substantial…
We’ve had hints of shock and awe, or at least a blind spraying of central bank bullets, in the range of Italian assets bought so far.
The first tricky thing here is that the ECB probably bought bonds on Thursday and Friday last week, which might not show up in the current data because of the time the purchases take to be settled. Therefore it might be a second week before we know the actual number.
Although the second tricky thing here is that the ECB will have to continue buying in strength in such a huge market as Italy’s – so ultimately weeks two or three or four will provide an equally key guide to its strategy. Once you get on the treadmill of keeping the Italian bond market liquid, you can’t jump off. There’s a further €2,155bn of combined Italian and Spanish debt to force into price stability in the coming weeks, even if the ECB bought €15bn last week.
When it comes to shock and awe and the really big numbers of the refinancing needs for Italy and Spain, though…
We’d be looking at bank demand for this week’s sterilisation of the augmented bond purchases as well as the bonds bought. That is, the size of total bid in addition to bid covers and rates. In 2010, demand dwindled over time as purchases gradually went up, so it’ll be interesting to see whether banks absorb a sudden increase easily, or not. If it goes badly in coming weeks (or bond-buying has to accelerate) we’ll be watching for indications that the ECB would go unsterilised and fully deploy its balance sheet.
In that case a few billions here or there wouldn’t matter. The ECB could go into trillions if it wanted (and actually, finance the EFSF’s transition into bond-buying — something that’s quite plausible we think, but not often discussed).
What that would do to the health of the organic investor base for Italian and Spanish debt, or actual discovery of sovereign risk, is another matter.
Related link:
Sterilising Silvio - FT Alphaville