ECB Said to Start Buying Covered Bonds With Negative Yields

The European Central Bank started buying covered bonds with negative yields as its asset-purchase program reduces the supply of the highly rated debt, according to two people familiar with the matter.

The central bank bought the debt in the past two weeks, said the people, who asked not to be identified because the information is private. The notes were from Germany, one of the people said.

The ECB has bought 69.7 billion euros ($75.5 billion) of covered bonds since October as part of its latest measures designed to stimulus growth in the euro area. The accumulation of assets is driving down yields and the central bank now holds about 15 percent of the market, according to ABN Amro Bank NV.

“The ECB has caused this situation by being a big buyer and has exacerbated the already negative net supply of covered bonds,” said Joost Beaumont, a fixed-income strategist at ABN Amro in Amsterdam. “If the ECB buys more, yields will go still lower and that’s going to affect the ECB itself.”

The ECB, which is also buying government bonds and asset-backed debt, has said it will buy negative-yielding securities up to its cash deposit rate of minus 0.2 percent.

An ECB spokesman declined to comment on its covered debt purchases.

A negative yield means investors buying the securities now will get back less than they paid if they hold them to maturity. Investors are willing to hold the notes because of their relative safety and because they still offer higher rates than top-rated government bonds and the ECB’s deposit rate.

Third Program

The central bank’s covered-bond purchase program is its third since the financial crisis and has prompted some of the biggest buyers of the notes from Union Investment Institutional GmbH to MEAG Munich Ergo Asset Management GmbH to scale back holdings.

Negative-yielding covered notes account for 20 percent of the 747.4 billion-euro iBoxx Euro Covered Index, a benchmark used by investors in the debt, according to Credit Agricole SA.

“Supply in positive yields is getting scarce and the ECB may have no other choice to fulfill its targeted purchase volume than to buy negative-yielding bonds,” said Tobias Meyer, an analyst at Norddeutsche Landesbank in Hanover, Germany.

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