Global Daily – ECB purchases raise questions

by: Nick Kounis , Joost Beaumont

ECB View: Purchases higher but questions about yield target – ECB net asset purchases amounted to EUR 24bn last week, down from EUR 29bn during the prior week although still above the EUR 20bn that it had bought on average this year before Lagarde announced the step up in purchases. The split shows that PEPP purchases were 19bn last week compared to 21bn the previous week and average of EUR 14bn before the ECB signalled it would step up purchases. Meanwhile, APP purchases amounted to 5bn (previously: 8bn). It could well be that the slowdown in net purchases was largely due to a pick-up in reinvestments. These numbers will be published tomorrow. Within the APP, net PSPP purchases were stable at around 5.3bn, while CSPP purchases were 334mn (was 2.1bn in week before last). Covered bonds and ABS posted a decline in net purchases (reflecting that the central bank did not reinvest the proceeds from all maturing securities).

Although the ECB has stepped up net purchases as it signalled it would, the pace of the last two weeks does raise some questions. In particular, it is unclear what weighted-average eurozone government bond yield level the ECB wants to achieve. If the ECB’s goal was to stem the steepening of yield curves, the current purchase pace makes sense, as it seems to be achieving that.

However, ECB Chief Economist Philip Lane has recently suggested that the central bank had the intention of driving government bond yields to the levels seen in mid-December. In mid-December the 10y weighted average yield ranged at around -0.18 to -0.2% compared to levels of around +0.05% during the purchase period. If the ECB is serious about achieving that kind of impact, a more significant acceleration in net purchases would likely be necessary. The ECB has in the past stressed the stock effect of asset purchases being more important than the flow in terms of the impact of government bond purchases. However, the only way investors can currently assess the likely stock we are likely to see over the coming months is via the weekly purchase data. So a stronger flow of weekly purchases would see investors extrapolate and hence price in a higher stock of eventual purchases over the coming months putting more significant downward pressure on yields.