ECB’s Market Dilemma: What Happens When Bond Supply Dries Up?

As the European Central Bank purchases bonds in an effort to stimulate the euro region’s economy, policy makers in Frankfurt face a dilemma: what to do when they run short of securities to buy.

At the current pace, the ECB will gobble up the entire supply of eligible bonds from the European Investment Bank and similar borrowers by March, according to Barclays Plc. A lack of net issuance by euro-region governments is curtailing the availability of securities, and the central bank said recently that purchases of covered bonds are becoming more challenging.