ECB Keeps Europe’s Bond Traders Guessing on Frontloading Policy

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The European Central Bank’s fine-tuning of its bond-buying program is starting to unsettle traders in the region’s debt markets.

Prices of sovereign securities fluctuated on Wednesday as investors weighed the timing and extent of the ECB’s plan to accelerate its debt purchases. While Executive Board member Benoit Coeure said last week the pace of buying would pick up this month and next to counter lower liquidity in July and August, data on Monday showed it slowed last week. An auction of German 30-year debt failed to draw sufficient bids to match its sales goal on Wednesday.

“Following last week’s somewhat lower-than-expected ECB asset purchases, I am hoping for stronger buying this week,” said Marius Daheim, a senior rates strategist at SEB AB in Frankfurt. If purchases don’t reflect Coeure’s comments “the latent doubts about the ECB’s ability to buy the desired quantities would quickly resurface,” he said.

The yield on 10-year German bonds rose one basis point, or 0.01 percentage point, to 0.55 percent at 5:15 p.m. London time, after rising and falling as much as three basis points, or 0.03 percentage point, earlier in the day. The price of the 0.5 percent security due in February 2025 was at 99.49 percent of face value.

The ECB’s plan to buy 60 billion euros of public and private debt a month has already come in for criticism because of the limited data provided on its purchases, the reductions in liquidity its buying may produce, and the risk that it will create price distortions. ECB purchases already helped push yields across the region to record lows this year as demand for sovereign securities intensified, before a selloff in late April and May erased the rally in the course of a few days.

Its press office declined to comment.

Purchase Pace

Coeure said the central bank would be “moderately” frontloading its purchases and data show there was already some pick-up in the pace earlier this month.

Holdings of government and agency debt under the central quantitative-easing program climbed by 11.8 billion euros to 134.2 billion euros in the week ended May 22. While that was the smallest increase in three weeks, the two previous weeks had the greatest purchases since March, with about 13.7 billion euros for each. A European public holiday on May 14 falls into the settlement period for purchases reported last week which is why the amound was smaller.

Bonds fell in Spain and Italy on Tuesday, even with the holiday-shortened week suggesting the ECB may need to suck up more bonds each day through Friday to keep up its weekly pace.

“Yesterday’s market moves were contradictory,” with peripheral bond spreads to Germany widening, said Jan von Gerich, chief strategist at Nordea Bank AB in Helsinki. “In light of the ECB’s comments of moderate frontloading, you would expect something to be seen already this week, or next at the latest.”

Balance Sheet

Last year, ECB President Mario Draghi said the central bank planned to expand its balance sheet toward 3 trillion euros to help rekindle inflation. As QE purchases are intended to last through September 2016, the current pace suggests the ECB will overshoot that balance-sheet target, according to SEB’s Daheim.

“There’s some good news,” Daheim said. “They could comfortably reduce their monthly purchases to 30 billion euros, say in January 2016, and still end the program in September 2016 above target at 3.1 trillion euros.”

Spanish and Italian securities rose on Wednesday as Greece said it will start drafting an accord on Wednesday with international creditors. Italy’s 10-year bond yield fell eight basis points to 1.86 percent and Spain’s dropped six basis points to 1.80 percent.

Germany’s auction of 30-year bonds drew bids for 1.5 billion euros, versus a sales goal of 2 billion euros. The Bundesbank allotted 1.42 billion euros of the debt due in August 2046 with an average yield of 1.18 percent.

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