ECB Said to Begin Buying German Government Bonds in QE

The European Central Bank was said to start buying euro-area government bonds as it took the first step of its expanded quantitative-easing plan designed to boost price growth in the region.

Central banks from the region bought German bonds, said two traders in government debt, who asked not to be identified because the transactions are confidential. Sovereign securities across the region advanced. A spokesman for the ECB declined to comment on the purchases.

Bonds rallied. The yield on Germany’s 10-year bunds fell four basis points, or 0.04 percentage point, to 0.35 percent at 8:54 a.m. London time, approaching the record-low 0.283 percent set on Feb. 26. Italy’s 10-year yield dropped four basis points to 1.28 percent.

Anticipation of the 1.1 trillion-euro ($1.2 trillion) plan already fueled a debt-market rally that sent yields in the 19-nation currency bloc to all-time lows, while helping push the euro to its weakest level in more than 11 years and send the Stoxx Europe 600 Index to the highest since 2007. ECB President Mario Draghi said in Cyprus last week that the stimulus will spur the euro area’s fastest economic growth in seven years and help return inflation to the ECB’s goal.

“The ECB may well have to bid bonds aggressively to procure them from their holders, in particular to avoid question marks around the credibility of its QE delivery,” Cagdas Aksu, an analyst at Barclays Plc in London, wrote in an e-mailed report. Yields on the safest euro-area bonds “will remain suppressed,” he wrote. “We also expect the core-periphery spreads of Italy and Spain versus Germany to grind tighter in this environment.”

Scarcity Bets

Speculation over the impact of the quantitative easing program has dominated trading of euro-area bonds since it was announced in January. Some holders of government securities have indicated an unwillingness to sell, sparking concern that there will be a scarcity of available debt for the ECB to buy, adding momentum to the rally. There’s also a risk that flexibility and limited information on the plan stirs market volatility.

The ECB said last week that the purchases, which are to include public and private debt, will be conducted in the secondary market by national central banks via existing counterparties. That’s in contrast to the Federal Reserve’s approach, which involved a calendar telling dealers what it intended to acquire and when.

While the ECB has said that only securities due between a minimum two years and a maximum 30 years and 364 days at the time of purchase will be eligible, national central banks will have some wiggle room as they carry out purchases within their home markets, allowing them some choice between government and agency debt.

Market Rocked

Purchases of bonds will be made roughly in proportion to the capital that each member central bank has contributed to the ECB, though that guideline doesn’t have to be strictly followed every month. There’s also flexibility on what maturity of bonds will be bought by the central banks to reach the target of 60 billion euros a month.

Events in Japan in 2013 may offer a cautionary tale for dealers and central bankers alike. That nation’s government-debt market was rocked as its central bank expanded a quantitative easing program. After yields fell to record lows, they more than doubled in five weeks amid confusion by banks that were supposed to help facilitate trading of the securities, obliging the Bank of Japan to boost the number of operations it held each month to buy the debt.

Plunging Yields

Borrowing costs in the euro area have plunged on concern the plan may lead to a limited availability of fixed-income assets. The average yield to maturity on the region’s government debt reached 0.538 percent Feb. 26, the least since at least 1995, according to Bank of America Merrill Lynch indexes.

About 45 billion euros a month will probably be spent on sovereign debt, a central bank official said Jan. 22. That implies an intention to purchase 14 percent of euro-area government bonds outstanding by September 2016, or 18 percent of securities from Finland, Germany, Luxembourg and the Netherlands, the only nations with two or more AAA ratings from the three major credit-assessment companies.

To rekindle inflation in the euro area, Draghi has said the central bank intends to expand its balance sheet toward 3 trillion euros. Since October, when it announced details of plans to purchase covered bonds and asset-backed securities, the ECB’s balance sheet has grown from 2.05 trillion euros.

Austerity Measures

It took the Fed almost six years, and three rounds of quantitative easing, to boost its holdings to about 20 percent of U.S. Treasuries.

Reduced government spending is likewise contributing to a global dearth of sovereign debt. Germany is due to curb the amount of conventional bonds outstanding by 8 billion euros this year. In Spain, where Prime Minister Mariano Rajoy’s People’s Party has implemented the deepest austerity measures in the nation’s democratic history, the net issuance target for 2015 is 55 billion euros, down from net sales of 97 billion euros in 2012.

The price of Germany’s 0.5 percent bund due in February 2025 rose 0.39, or 3.90 euros per 1,000-euro face amount, to 101.43.

Germany’s six-year yield was at minus 0.04 percent. A negative yield means investors buying the securities would get less back than they paid if they held the bonds to maturity.

(Source: Bloomberg)