Schroders Sees Slow Grind of ECB Bond Buying on Day-One EvidenceEshe Nelson
As the European Central Bank embarked Monday on day one of a plan to buy the region’s sovereign debt, demand for the assets drove yields to record lows from Ireland to Finland. And that’s only the start of a 19-month journey.
“You tend to look at it as a grind higher rather than big fireworks,” Gareth Isaac, a London-based senior money manager at Schroders Plc, which manages 51.1 billion pounds ($77 billion) in fixed-income assets, said on Monday. “We are likely to see this grind continue because the ECB is taking out so much paper, especially in terms of core markets, consistently over time.”
By September 2016 the ECB and national central banks plan to have acquired 1.1 trillion euros ($1.2 trillion) of public and private debt, pumping cash into the euro-region economy to rekindle growth. Challenges facing them include finding enough eligible securities and willing sellers while maintaining liquidity in bond markets.
To execute the plan, central banks across the euro area are seeking the best prices from at least three dealers, according to the ECB. Each of the central banks has daily targets based on evenly distributed buying across the month.
As the central banks carried out their acquisitions of government debt on Monday, dealers observed that the size of individual trades -- at between 15 million euros and 50 million euros -- was relatively small, limiting volatility.
“Smooth start is the general tone across countries and curves,” said Antonio Torralba, head of flow rates trading at Banco Bilbao Vizcaya Argentaria SA in Madrid. “There is little disruption which is a positive thing for efficient implementation.”
ECB President Mario Draghi said it will purchase a total of 60 billion euros a month. Of those, 45 billion euros will be in sovereign debt, a central-bank official said on Jan. 22. At 2.25 billion euros a day, across 20 trading days, central banks will probably make around 100 trades each day, assuming an average size of 20 million euros to 25 million euros.
“The price action was noticeable from the off,” said Isaac at Schroders. “It started out relatively cautiously. German government bonds were pretty well-bid and you continued with that flow throughout the day. The bonds were going up in places like Italy and Spain, they just couldn’t keep up with the level of rally in Germany.”
Schroders has been reducing holdings in peripheral debt as expectations the bonds of Spain, Italy and Portugal will rally make for a “very, very strong consensus trade,” Isaac said. “It gets worrying when everybody tells you the same thing.” Prices on the debt have become hard to justify on the basis of economic and political fundamentals, he said.
Euro-area bonds extended a 14-month rally on Tuesday and rates reached record lows from Spain and Italy to Germany and the Netherlands.
When the Federal Reserve bought Treasuries as part of its monetary policy, it typically used reverse auctions, at which dealers competed on price to sell securities to the U.S. central bank.
The ECB says it hasn’t ruled out that approach for the future. It also says it’s still working on some parts of the plan, including securities lending.
The ECB’s plan suggests an intention to buy 14 percent of euro-area government bonds outstanding by September 2016, or 18 percent of securities from Finland, Germany, Luxembourg and the Netherlands, the only nations with two or more AAA ratings from the three major credit-assessment companies.
Demand for debt securities globally will outstrip supply by about $400 billion in 2015, according to data compiled by JPMorgan Chase & Co. last year.
“Whether they will be able to find the paper in three, six, nine, 12 months’ time is a different story,” Schroders’s Isaac said. “And whether they change the parameters of the program to adapt to market liquidity or market distortions, we’ll have to wait and see.”