Friday, January 9, 2015

ECB QE: What to Expect When You Are Expecting!

Some quick charts on the expected QE from ECB

The first chart shows the maturity distribution of sovereign debts across euro are countries as well the US and the UK. Except Greece, most of the other countries in Euro area are front-loaded. However, Germany, with the highest capital contribution to the ECB has the least amount in the near maturity bucket.

Source: Bloomberg

The second chart shows the holding patterns across different sovereigns, split in to MFIs (monetary financial institutions including banks and central banks), Other FIs (insurance, pension funds etc), Other residents (individuals, non-fin corporates and governments social securities holdings etc) and finally non-residents. Note for Euro area countries, non-residents may include residents from other euro zone countries. Except for Spain, domestic banks holdings are comparatively low, given they are the primary player for QE auctions. Which is potentially significant especially if the other holders are sticky (held till maturity)

Source: Bruegel data base

The third chart shows a scenario of possible pressure from ECB QE. This assumes a EUR 500b size and focus on less than or equal to 3 year maturities (as indicated in previous similar policies, including OMTs), and ECB buys according to capital contribution. Also assumes incremental net new issuance will be small. The chart shows target purchase for each country as a percentage of total outstanding of the within target maturity bucket, as well as percentage of bonds held by MFIs (assuming, conservatively, 50% of the non-resident is held by other euro area MFIs). Note the significant pressure on Germany as well as France, Netherlands and Portugal. (Greece may not be in chart as ECB already holds significant amount).

We opened the year with continued sell off in EUR and flows in to bonds. The broader question on the long end rates is now NOT about Europe anymore, but about US. How much of the flows we have seen in to long end US in 2014 will continue. Will we see carry flows from Europe in US rates. And more fundamentally, what drove the US long end down? An expectation of subdued inflation in spite of improving economy (i.e. risk neutral rates remaining down) or is it purely flow driven compressing the term premium?

I hope to have a model to look in to this sometime. The answer will guide what kind of rates transmission on the long end we will see when the eventual lift-off happens. Will we see a sharp sell-off in the long end from reversing flows? Or will we continue to have a subdued transmission to the long end from Fed hikes, as we have seen in past hiking cycles progressively since mid 80s?


  1. I remember brad Delong saying last week that it can't be flows because TIPS nominals have actually gone up in the same period... From the taper onwards if I remember correctly. Haven't checked myself though.

  2. Ah I missed it then! The thing I hate about that blog is the presentation so bad :( ... things are all over the places. But thanks for pointing out this interesting observation, I will have a look some times.