Draghi in QE Quandary After Draining Bond Market by $800 Billion

QE: Is Draghi Getting What He Paid for?
  • It’s like building ‘a boat in the open sea,’ says Rabobank
  • Germany could face hurdle in executing QE plan: DZ Bank

The biggest buyer of European government bonds may have to start spreading its money around a bit more widely.

QuickTake Europe’s QE Quandary

The European Central Bank expanded the size of its debt-buying program in April by a third to 80 billion euros ($89 billion) a month and appears to be running out of securities eligible under its own rules.

Monetary policy makers increased purchases of Irish and Portuguese bonds last month by less than it did for German debt, suggesting demand already threatens to outstrip supply from some countries. Banks say it might have to include more bonds or risk diluting the stimulus to the economy the quantitative easing is designed to inject.

“Everything is on the table,” said Richard McGuire, head of rates strategy at Rabobank International. “Whenever they meet resistance, they get around it by adjusting the rules, adjusting the limits or targeting new asset classes.”

Purchases at the moment are based on the size of a country’s economy and there are exclusions linked to debt restructuring. Rabobank estimates 1.13 trillion euros of bonds currently off limits could be eligible should the ECB change the parameters.

The ECB started buying sovereign debt in March last year and has spent more than $800 billion. An ECB spokesman said on Tuesday that the bank is confident the program will continue to be implemented smoothly and it sees no shortage of eligible assets under the current rules. President Mario Draghi said a month ago that there were no plans to make any changes.

German Pressure

The securities are acquired through each country’s central bank and broadening the remit would particularly help relieve pressure on Germany. While the country has a lower amount of outstanding debt compared with say Italy, the Bundesbank currently must buy a greater amount because its economy is the largest.

“Germany is definitely affected very much by lack of eligible bonds,” said Daniel Lenz, lead market strategist at DZ Bank in Frankfurt. “Outstanding volumes compared to other countries are low and new bond issuances are also low.”

German bonds have been the best performers among the 10 largest markets eligible in the ECB program, returning 2.2 percent over the 14 months of its lifespan. But at today’s pace of bond buying, Germany would exhaust the supply of sovereign bonds by September 2016 or February 2017 if the debt of German regions is included, assuming the ECB doesn’t broaden its criteria.

“They are basically building the boat in the open sea,” McGuire said.

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