ECB bond buying expands QE scheme

Market responds positively

THE EUROPEAN Central Bank (ECB) started buying government bonds under its expanded quantitative-easing (QE) plan designed to boost price growth in the region.

Central banks bought German and Italian debt, according to at least two people with knowledge of the transactions, who asked not to be identified because the information is private. They also purchased Belgian securities, one of the people said, and a separate person said French notes were being acquired.

Bonds rallied. The yield on Germany’s 10-year bunds fell five basis points, or a 0.05 percentage point, to 0.35 percent at 10.30am London time, approaching the record-low 0.283 percent set on February 26. Italy’s 10-year yield declined three basis points to 1.29 percent.

“The QE purchases are having the expected effect and the market is very positive,” said Michael Leister, a senior rates strategist at Commerzbank in Frankfurt.

“In the core we’re seeing yields dropping sharply lower led by the ultra-long end, so these are very much QE-style moves. Near-term it’s going to stay quite volatile because there are some sellers who did front-run these purchases and now are keen to sell.”

The ECB said in a Twitter post that it had started purchases along with national central banks. The Bundesbank was active in the market from 9.25am Frankfurt time, a spokesman said.

Anticipation of the 1.1 trillion (R14.1 trillion) plan already fuelled a debt-market rally that sent yields in the 19- nation currency bloc to all-time lows. ECB president Mario Draghi said in Cyprus last week that the stimulus would spur the euro area’s fastest economic growth in seven years and help return inflation to the ECB’s goal.

“The ECB may well have to bid bonds aggressively to procure them from their holders, in particular to avoid question marks around the credibility of its QE delivery,” Cagdas Aksu, an analyst at Barclays in London, said in a report. Yields on the safest euro area bonds “will remain suppressed. We also expect the core-periphery spreads of Italy and Spain versus Germany to grind tighter in this environment.”

Belgium’s 10-year yield tumbled six basis points to 0.57 percent and the rate on similarmaturity French debt dropped five basis points to 0.64 percent.

Speculation

Speculation over the impact of the quantitative easing programme has dominated trading of euro area bonds since it was announced in January.

Some holders of government securities have indicated an unwillingness to sell, sparking concern that there will be a scarcity of available debt for the ECB to buy. There is also a risk that flexibility and limited information on the plan stirs market volatility.

The ECB said last week that the purchases, which were to include public and private debt, would be conducted in the secondary market by national central banks via existing counterparties.

That is in contrast to the Federal Reserve’s approach, which involves a calendar telling dealers what it intended to acquire and when. – Bloomberg