The European Central Bank has opened the kimono on the amount of bonds it has bought as part of its bid to stabilise securities markets — and a few analysts have delved inside, to consider how the programme is going.
First, Harvinder Sian of RBS:
The ECB has saved us the trouble of going through the weekly balance sheet tomorrow by announcing that its buying programme is EUR 16.5 to 14th May, on a settlement basis. That means this buying covers only the first 2-days of the ECB intervention, but that is the bulk (c. 90%) of the buying anyway, as Wed-Friday flows were much lighter.
Sian also considers the market impact of the ECB’s programme now that we have the full details, starting with its chosen instrument of sterilisation — a weekly deposit tender. As he notes:
The 1-week EONIA is trading 0.35% and we expect the 1w term repo rate to be well below this. The floor is likely to be at the ECB’s 0.25% overnight deposit rate and overall we think a rate of 0.28-30% is likely. The reason is that bank credit lines are full so they will be very happy to give the ECB excess cash, rather than go to another market counterparty.
But back to breaking down the bond-buying, emphasis FT Alphaville’s:
The bond buying data is periphery bullish, at least for short dates. Some investors may be nervous that the ECB bought only EUR 16.5 bn on Monday/Tuesday. Our interpretation is that this small amount went a long way and given that the ECB is unlikely to give any signal on how much more or how long they will buy, then it should give some confidence that prices are back-stopped.
Going forward, the ECB will play games with the market. The low buying in recent days makes me suspicious that they are trying to suck in investors to short periphery bonds only to then ultimately turn up one morning with aggressive buying once more. Remember also that the purchased bonds are unlikely to be avaliable for repo so the cost for shorts could get punitive anyway. Net/net, remember that the total volume of 1y-5y paper in Greece, Portugal and Ireland is just EUR 140 bn on the iBoxx index, so they can end up with a large market share of the free float very quickly.
Sneaky ECB, in that case. We’ll have to watch the yields and see. Sian continues:
There is no breakdown in terms of periphery buying volumes by country, or curve segment. This is unlikely to change because it keeps the tactical advantage with the ECB…
Likewise, there is no breakdown in terms of sovereign bond buying versus private sector paper. We believe that only a small allocation has so far been made to private sector paper but also strongly expect that any further deterioration in market conditions will see more activity here. Why? The nightmare scenario is that markets do not rollover the private liabilities of Spain/Portugal given that banks and corporates here are reliant on external funding.
Meanwhile, Unicredit’s Luca Cazzulani and Marco Valli offer some context to the numbers announced on Monday:
For what concerns the EUR 16.5bn (and assuming that they are all government bonds), it represents around 2% of the outstanding M/L debt of Ireland, Portugal, Greece and Spain. This should be just the first step and more purchases will likely be required to stabilize the market. As a reference, they should do another EUR 70bn to reach 10% of the total outstanding debt of these four countries (Ireland: EUR 82bn, Portugal: 97bn, Greece: 258bn, Spain: 400bn). However, the ECB did not disclose either the country split of the purchase, or the maturity split.
While BBH currency analyst Win Thin looks to the longer term:
If the ECB has had to buy debt this past week, that basically tells us that in the private sector, there are more sellers than buyers. Otherwise, there would be no need for the ECB to step in. If they have indeed stepped away a bit and yields then go up, that suggests that there are still more private sector sellers than buyers…
…perhaps having the ECB buy up this debt will make an orderly debt restructuring easier sometime down the road. The ECB is certainly in a better position to take a haircut than the European banks.
The fun has only just begun, then. In so far as you can consider a Securities Markets Programme run by the European Central Bank fun, that is.
Related links:
The slippery slope to non-sterilisation – FT Alphaville
Europe’s QE is sterilised and sensitive - FT Alphaville
In Europe We Trust – FT Alphaville
