Portugal Bonds Falter as ECB Running Out of Eligible Debt to Buy

  • Continued deviation from ECB bond-buying rules looks likely
  • Bond yields have climbed as market wakes up to lower demand

The European Central Bank is running out of Portuguese bonds to buy.

The central bank’s holdings of Portugal’s debt are already pushing the limit set by its own guidelines, leaving it likely to buy less this year to avoid breaking those rules. That prospect has led to a selloff in Portuguese government bonds, with 10-year yields having risen almost 40 basis points since the ECB’s December meeting to hit an 11-month high last week.

The ECB will have to scale back Portuguese purchases by around a half, according to Commerzbank AG, while ABN AMRO Group NV sees it stopping or suspending them by June. To make up the shortfall, the ECB may continue to buy more bonds from other countries with a greater pool of eligible securities, such as Germany and France.

“We remain cautious on PGBs overall,” said Bank of America Merrill Lynch analysts including Ruairi Hourihane in a report on Jan. 13. “The QE tweaks announced in December benefited core countries far more than Portugal and the periphery. In fact, the new QE parameters made the continuation of QE in Portugal slightly more difficult.”

The ECB’s holdings of Portuguese bonds via its Public Sector Purchase Program were 24.6 billion euros as of Dec. 31, with an additional 12.4 billion euros held under its Securities Markets Program as of 2015, according to ECB data. That is similar to the 36 billion euros of bonds outstanding from Portugal eligible under the program, according to data compiled by Bloomberg.

Average monthly purchases of Portuguese bonds should be around 1.4 billion euros, data compiled by Bloomberg show, based on the ECB’s guidelines known as the capital key. Instead they averaged 1.1 billion euros since April 2016, according to ECB data. The central bank’s overall monthly buying will fall to 60 billion euros from 80 billion euros this April.

It will be able to purchase a third of Portugal’s new debt scheduled this year. The nation’s debt agency is expected to announce 2017 bond sales of around 14-16 billion euros. This would enable the ECB to purchase around an average of 440 million euros a month.

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