Deutsche Bank’s Woes Put $2 Trillion of Bonds Beyond ECB’s Reach

  • Haven demand makes more sovereign debt ineligible for QE
  • German 10-year bund yields fall for third straight week

The troubles of Deutsche Bank AG are making European Central Bank President Mario Draghi’s job more complicated.

The surge this week in relatively safe sovereign securities left about a third of the Bloomberg Eurozone Sovereign Bond Index ineligible for purchase under the ECB’s quantitative-easing program. The gains mean $2.2 trillion of debt in the index now yields less than the institution’s deposit rate -- currently minus 0.4 percent -- and is therefore off-limits.

That’s increasing speculation the ECB will have to tweak its public-sector purchase program, through which it buys 80 billion euros ($90 billion) of securities each month. The program is due to run until at least March as policy makers try to boost growth and inflation.

“It puts more pressure on the ECB to tweak the PSPP because with yields falling like that, more bonds are falling below” the buying threshold, said Vincent Chaigneau, London-based global head of rates and foreign-exchange strategy at Societe Generale SA. “That’s definitely adding pressure to make an announcement.”

The “big question,” Chaigneau said, is whether the ECB will opt for “selective buying” of bonds yielding less than the deposit rate.

While Draghi and his colleagues already appointed a committee to improve the implementation of QE, a bond selloff after the ECB’s Sept. 8 policy decision eased pressure on the central bank by reducing the amount of bonds it couldn’t buy.

Ten-year German bund yields touched a post-Brexit-decision high of 0.08 percent within a week of the meeting, before falling back to minus 0.12 percent as of the 5 p.m. London-time close on Friday. That’s the third straight week that yields on the euro region’s benchmark government securities have dropped.

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