“Taper Tantrum” Talk Starts In Europe Two Days Into Q€

The ECB’s PSPP got off to a rather inauspicious start on Monday when the central bank admitted that the governing council “hasn’t agreed on how to treat losses” on bonds with negative yields. Clearly this is a problem given that: 1) quite a bit of core, shorter-dated paper already trades in negative territory, and 2) the purchases themselves will drive down yields across the board in what will quickly become a self-fulfilling prophecy. The only hint given as to how the ECB and NCBs intend to tackle the issue was this: “National central banks might try to avoid buying such securities for now.”

Then we learned that DOMO trades were going through in increments of between €15 and €50 million suggesting that a general lack of supply and/or liquidity may well stymy the entire enterprise. On that point, we said the following: 

Needless to say, if the ECB is unable to meet its monthly asset purchase targets (which, at €15-50 million dribs and drabs, looks likely), expect chaos, as the market has spent the last several months front running PSPP and would be absolutely horrified if DOMO (Draghi-open-market-operations) has to be downsized. 

On day two of PSPP the news continued to reinforce both the idea that “avoiding” negative-yielding assets will be quite difficult given the program’s scope and, relatedly, sourcing enough bonds to meet monthly targets is going to prove exceptionally difficult in some markets. 

As for trying to avoid negative-yielding assets, it appears as though that effort lasted all of 24 hours. Here’s Bloomberg: 

• Central banks said to buy German notes that have negative yields
• Central banks purchased 5Y securities, said three people with knowledge of the trades, who asked not to be identified because the transactions are confidential

In terms of sourcing enough purchasable bonds, Citi notes that if, in a pinch, the ECB expanded the issue cap all the way up to 50% (from 25%) in non-CAC bonds (NCBs can’t do this with paper that contains CAC clauses without obtaining a blocking minority), the central bank could add an additional €500 billion to the program: