ECB Regional Bond Buying Seen Alleviating German Debt Scarcity

  • QE-eligible German bonds to increase by 227 billion euros: ABN
  • Added German debt may cover six-month QE extension: ING

The European Central Bank’s decision to include regional bonds in its asset-purchase program has one main beneficiary, according to ABN Amro Bank NV -- German government securities.

Debt sold by Germany’s 16 Federal states, or Laender, has been added to the bonds eligible for purchase under the ECB’s stimulus plan. While the additional debt represents only a tiny slice of the central bank’s 1.5 trillion-euro ($1.6 trillion) program, it will help alleviate the bottlenecks faced by the Bundesbank and the ECB in buying German bonds.

“Buying constraints were foreseen for especially German securities,” Kim Liu, a senior rates strategist at ABN in Amsterdam, wrote in an e-mailed report dated Dec. 7. “By adding regional bonds, the pressure of having enough German assets has become less.”

Liu estimated that the pool of eligible German bonds will expand by 227 billion euros, or more than a third of the 302 billion euros of the total eligible regional debt securities in the currency union.

Benchmark German 10-year bund yields fell one basis point, or 0.01 percentage point, to 0.57 percent at 4:35 p.m. London time. The 1 percent security due in August 2025 rose 0.12, or 1.20 euros per 1,000-euro face amount, to 104.05. The yield reached 0.74 percent on Dec. 4, the highest since Sept. 18.

Purchase Limits

In an attempt to boost the region’s economy and fight deflationary pressures the ECB extended its 60-billion-euro-per-month stimulus plan by six months to March 2017 and also lowered its deposit rate by 10 basis points, or 0.1 percentage point, to minus 0.3 percent on Dec. 3.

Adding regional debt is limited by the ECB’s rule on the amount of bonds it can buy per issue, which is currently 33 percent.

“The inclusion of regional and local government bonds will predominantly expand the purchasable universe in Germany,” Martin van Vliet, senior interest-rate strategist at ING Groep NV in Amsterdam, wrote in a note to clients. “Taking into account the issue share limit, the expansion of the German purchasable universe is probably just enough to offset the six-month lengthening of the program to March 2017.”

The extra German purchases would be about 72 billion euros, van Vliet estimated. He said the lowering of the ECB’s deposit rate has freed up some shorter-dated German securities and made them “eligible again” for the central bank’s stimulus plan.

Before the ECB’s decision to cut its deposit rate, more than $2 trillion of bonds yielded below the previous rate of minus 0.2 percent, according to data compiled by Bloomberg, thus deeming them ineligible for the buying program.

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