The European Central Bank is showing its targets are movable when it comes to buying bonds.
When the ECB announced it would ramp up purchases in May and June, many investors were caught off guard, having taken the 60 billion-euro ($65.4 billion) monthly target as set in stone. In reality, the quantitative-easing program is proving more flexible than many anticipated as the ECB tailors it to seasonal demand.
“It will be seen as a smoothing operation,” said David Tan, London-based head of rates at JPMorgan Asset Management, which oversees $1.7 trillion. “They just do not want to see massive jumps up or down. Had things been a lot more turbulent I’m sure that would have been a lot more aggressive.”
Data provided by the ECB in Frankfurt showed the summer “frontloading” amounted to about 6 billion euros, meaning it added to its usual purchases in previous months to take into account the expected lull in coming weeks.
President Mario Draghi also hinted last week that the ECB will increase or reduce purchases to offset quiet market activity more regularly.
“There should be frontloading because usually people work less in August, so there is less of a market there, like in December,” Draghi said at a July 16 news conference. “So be ready.”
That means officials are likely to accelerate purchases again in November to compensate for a market slowdown at the end of the year, according to people familiar with the matter who asked not to be identified because the plans are private.
Quantitative easing started in March with the central bank buying government and agency debt, covered bonds and asset-backed securities. Data from the ECB shows the bank bought 63.1 billion euros of securities in May and 63.3 billion euros in June. It will publish details of this month’s purchases on Aug. 3.
The pledge by policy makers to follow the U.S. and Britain by channeling money into the economy via bond purchases has helped protect the market in recent months as Greece’s future in the euro region hung in the balance.
The program hasn’t made euro-area debt a one-way bet. Bonds from the region lost 0.2 percent in the year through Tuesday, according to Bloomberg World Bond Indexes.
That’s even after ECB Executive Board member Benoit Coeure sparked a surge in the market on May 19 after he said that the ECB would increase the pace of purchases to compensate for an expected decline in market liquidity from mid-July to August. If needed, the bank could increase buying in September, he said.
Ten-year yields on Italian, Spanish and German bonds all fell to one-week lows after the announcement, while the euro dropped the most in two months against the dollar. Italy’s 10-year yield fell three basis points Wednesday, or 0.03 percentage point, to 1.94 percent at 4:50 p.m. London time.
“When they first announced frontloading, people cared because they thought it could be 10 or 20 billion euros,” said Lyn Graham-Taylor, a rates strategist at Rabobank International in London. “In the end it was so small that people will largely shake it off.”