Back in April, BofA analyst Barnaby Martin suggested that in order to mitigate the potential fallout from the end of the ECB’s QE, the European Central Bank could engage in an “Operation Twist” to flatten the curve and keep term premiums low, or in other words, to avoid chaos for the European bond market.
BofA: “Our economists have recently talked about the possibility of an “Operation Twist†to the ECB asset portfolio, to help keep term premiums low.”
— zerohedge (@zerohedge) April 13, 2018
Overnight, and a little over two months later, Reuters reported that the ECB is indeed considering buying more long-dated bonds from next year as part of its bond reinvestment strategy to keep eurozone borrowing costs in check, effectively copycatting what the Fed did with its own Operation Twist first in 1961 and then again 2011, where the central bank replaced short-dated paper with longer-term debt to lower market interest rates and boost an ailing economy (which begs the question: is the European economy that ailing that the ECB is scrambling to come up with QE extensions even at a time when the Eurozone is supposedly recovering).
In this particular case, the “Twist” would be aimed at limiting the natural aging of its 2.6 trillion euro bond portfolio and keeping a lid on long-term bond yields, a key determinant of borrowing costs, bu maintaining a bid for long-term debt while short-term holdings are sold.
As is well known, while the ECB announced recently it would end its QE (absent major market shocks) in 2019, it will continue to reinvest the money it gets from maturing paper for a long time, to ensure cash in the euro zone remains abundant.
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And, according to Reuters, conversations with five central bank sources show policymakers are wary of seeing long-term yields creep back up as the ECB’s stock of bonds ages, or “loses duration†in market parlance. To avoid this, the ECB is considering buying more longer-dated bonds, generally seen as maturing in 10 years or more, with the cash it gets from maturing paper. Additionally, since the ECB remains constrained by how many German bonds are available, the central bank may also smooth out its reinvestments by occasionally deviating from its “capital key†rule, Reuters sources added.
