ECB Bond-Buying Pattern Shows Core Taper Underway for ABN AmroBy and
German, Finnish, Dutch debt purchases slip below capital key
Shortfall offset via overbuying in securities of France, Italy
While markets are busy worrying when the European Central Bank will announce plans to taper its bond purchases, the move may have already begun, according to ABN Amro Bank NV.
The central bank’s buying of German debt has remained below capital-key guidelines, which require purchases to be broadly in line with the size of each economy, for the last three months. The ECB has been underweight in Finland for six months and the Netherlands for two. It may have scaled back buying of core European bonds on approaching the 33 percent issuer limit, asset purchases data for June show. An ECB spokesperson declined to comment.
A shortage in core government securities, while somewhat offset for now by the ECB’s overbuying in France and Italy, could increase pressure on the central bank to officially start tapering even if inflationary pressures remain subdued. The monetary authority has removed a yield floor for its purchases, which allowed it to buy lower-yielding German debt and reduce the weighted average maturity of its holdings to a record-low 3.99 years in May.
“The recent data reveals that the ECB is forced to de facto taper its core-country buys even before the QE program’s potential deadline of December 2017,” Kim Liu, a fixed income strategist at ABN Amro Bank NV, wrote in a note to clients. The bank is “still managing to buy more than the prescribed monthly amount of 60 billion euros ($68 billion), although the constraints are becoming more visible and will intensify.”
German 10-year bond yields have climbed 26 basis points over the past three months to 0.49 percent, approaching the highest levels of the year.
Historically, the ECB has overweighted core euro-area bonds in its so-called quantitative easing program as it has been unable to buy enough in peripheral countries such as Portugal and Ireland, while Greek debt has remained out of bounds altogether. The past few months, therefore, mark a significant shift in the bank’s approach, according to Citigroup Inc.
‘Change of Behavior’
“With three months of consistent data, this is a clear change of behavior,” Citigroup strategists led by Aman Bansal wrote in a note to clients. “It highlights the increasing scarcity of German bonds and the reliance of QE on France and Italy.”
Last week, Draghi triggered a bond selloff by saying that deflationary forces in the euro zone had been replaced by reflationary ones, fueling widespread speculation that tapering will be announced in autumn. He also reiterated that the asset-purchase program had enough “flexibility.”
Bloomberg calculations to determine the capital key were based on euro-area nations’ capital contributions to the ECB, while excluding those of countries outside the union and of Greece, which is currently ineligible.