ECB asset purchases Heading towards a German wall - DNB
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CREDIT RESEARCH 27 June 2017
ECB asset purchases
Heading towards a German wall Bloomberg DNBM
We believe the ECB is set to further taper purchases Credit research
under its Asset Purchase Programme (APP), starting in Ole Einar Stokstad
Martin Børter
+47 24 16 90 48
+47 24 16 90 46
2018. However, DNB Markets expects the programme Shawn Courcelles
Mikael Løkken Gjerding
+47 24 16 91 28
+47 24 16 90 47
to be increased in length, to mid-2019. On our Rolv Kristian Heitmann
Fredrik Hössjer
+47 24 16 90 49
+46 8 597 912 16
estimates, the ECB will probably run out of eligible Thomas Larsen
Knut Olav Rønningen
+47 24 16 90 44
+47 24 16 90 45
German debt assets prior to this, and will have to Kristina Solbakken Lund
Magnus Vie Sundal
+47 24 16 90 51
+47 24 16 91 23
amend its guidelines in order to continue the asset Erik Öberg
Fixed income sales Oslo
+46 8 473 48 49
+47 24 16 90 30
purchases. Fixed income sales Stockholm +46 8 473 48 60
For full contact list, see last page
We expect the ECB to extend its asset purchases. Despite having purchased
nearly EUR2trn worth of debt securities, we believe that fragile European economic
growth will lead the ECB to continue its Asset Purchase Programme until mid-2019,
but at a reduced pace, starting in 2018. From current levels of EUR60bn/month, we
believe purchases will be reduced, to EUR40bn/month in H1 2018, EUR20bn/month in
H2 2018, and EUR10bn/month in H1 2019. By mid-2019, aggregated purchases will
have amounted to nearly EUR2.8trn.
Bund scarcity likely to become an issue. Approximately 82% of purchases have
thus far been allocated to the Public Sector Purchase Programme (PSPP), under
which the central bank buys debt securities issued by central, regional, and local
governments, as well as domestic, international, and supranational agencies. A large
allocation to German bonds, combined with shrinking German government debt limits
the volume of eligible debt securities available for purchase. Although the ECB
currently has some headroom, we believe this could become a problem under current
ECB guidelines.
Close to the limit. We estimate that the ECB already owns 20–23% of eligible
German debt securities. By mid-2019, we estimate that the ECB will own 28.7–33.6%
of PSPP-eligible German debt. According to the central bank’s guidelines, maximum
ownership for such debt is 33%, but in cases where this would give the ECB a
blocking minority position, ownership is limited to 25%. With about half of German
sovereign bonds containing such clauses, we estimate the real ownership limit to be
closer to 30%. In our various scenarios we find that the ECB could reach this limit as
soon as H1 2018, but most likely towards the end of 2018.
Where there’s a will, there’s a way. Guidelines can be changed, as the ECB has
already proven, when deciding to remove the lower yield and maturity criteria in
December 2016, or including regional and local government debt, in December 2015.
Consequently, we believe the central bank will find a way to run supportive policies if it
wishes to do so. We believe a first step will be to re-allocate purchases to countries
such as Italy and France, or the other programmes under the APP, such as to covered
bonds or corporate bonds. Finally, it could also consider removing the 25/33% limit it
currently applies, although we find this more problematic, as it would give the central
bank a blocking minority position in certain bond issues. ANALYSTS
Magnus Vie Sundal
Credit strategist
magnus.vie.sundal@dnb.no
+47 24 16 91 23
Please see last page for disclaimer and information
regarding distributionDNB Markets | ECB asset purchases
27 June 2017
Background and programme overview
Since Mario Draghi made his famous statement that the “ECB is ready to do whatever it takes ECB’s supportive monetary policy did
1
to preserve the euro. And believe me, it will be enough” in 2012, there has been little doubt not come as a surprise, and we do not
that the European Central Bank would run a supportive monetary policy in the years ahead. expect the central bank to stop the
With a backdrop of three quantitative easing programmes and “Operation Twist” conducted by programme anytime soon
the Federal Reserve, the introduction of ECB’s ABS Purchase Programme (ABSPP) and
Covered Bond Purchases Programme 3 (CBPP3) did not surprise markets, nor did the
2
expansion through the announcement of the Public Sector Purchase Programme (PSPP),
four months later. These programmes – the ABSPP, CBPP3 and PSPP – are the pillars of the
Asset Purchase Programme (APP), together with the Corporate Sector Purchase
3
Programme (CSPP), introduced in April 2016. As the CSPP commenced in June 2016, total
purchases under the APP were increased, from EUR60bn to EUR80bn, but later scaled down
to EUR60bn/month, from April 2017. We still believe the programme may continue for another
two years, as described on the following pages, but that monthly purchases will be scaled
down further, starting in early 2018. For a full timeline, see the appendix.
In terms of reception in the market, the introduction of the APP became a “buy the rumour sell
the fact” kind of event. Especially with the commencement of purchases under PSPP (March
2015) and later expansion (June 2016), we saw interest rates and credit spreads tightening
substantially prior to the introductions. However, following commencement of purchases,
interest rates rose substantially.
Figure 1: Sovereign bond yields (note: Portugal on rha) (bp) Figure 2: CDS spreads (bp)
Source: Bloomberg, DNB Markets Credit Research Source: Bloomberg, DNB Markets Credit Research
Certain restrictions apply to purchases under the PSPP. Under the programme, the ECB The PSPP includes purchases of
purchases central (and in December 2015 expanded to also include regional and local) - Sovereign, regional, and local
government debt issued by the Eurozone member countries, as well as debt issued by certain government, as well as agency
national, international, and supranational institutions and agencies. International and debt
supranational institutions and agencies may comprise up to 10% of purchases. All debt - International and supranational
should carry an investment grade rating. agency debt (10%)
After the initial yield floor equal to the ECB deposit rate (-0.4%) was removed in January - Only investment grade securities
2017, any yield is permitted in the programme, but the bonds should have a remaining - All yields permitted
maturity between one and 31 years. Finally, the central bank is limited to holding not more - Tenor of 1–31 years
than 33% of any bond issue for governments and 50% for supranationals. However, the 33% - Maximum ownership of 33% in
limit is lowered to 25% for bonds in which 33% would not give the ECB a blocking minority for bond issues, 50% for supranational
the purpose of collective action clauses. agencies
1
https://www.ecb.europa.eu/press/key/date/2012/html/sp120726.en.html
2
https://www.ecb.europa.eu/press/pr/date/2015/html/pr150122_1.en.html
3
https://www.ecb.europa.eu/press/pr/date/2016/html/pr160421_1.en.html
2DNB Markets | ECB asset purchases
27 June 2017
European growth fragile, QE to be extended
While the outlook for the Eurozone is improving, the upswing remains fragile. Although PMIs The current European upswing remains
are looking strong, and unemployment continues to fall (albeit at still elevated levels), inflation fragile. Consequently, we expect the
remains stubbornly low. Moreover, we are seeing a slowdown in the Chinese economy, as ECB to extend the Asset Purchase
authorities shift focus from hefty growth to increased financial stability. This could further Programme
contribute to a negative growth impulse to European economies, as we have seen indications
that China tends to be a leading factor in European performance in recent years. Combined
with slack in the labour market, we believe inflation will remain low, and that the ECB will
4
continue its quantitative easing for a prolonged period of time .
Figure 3: Eurozone PMI development (pts) Figure 4: Eurozone economic surprise index (pts)
65 100
60 80
60
55
40
50
20
45 0
40 -20
-40
35
-60
30
-80
Jul-98
Jul-99
Jul-00
Jul-01
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
-100
-120
Composite Manufacturing Service Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17
Source: Markit, Thomson Datastream Source: Citigroup, Bloomberg
Figure 5: Eurozone inflation (YOY, %) Figure 6: DNB Markets’ macro-score, YOY change, China
and Eurozone (nine months lagged) (pts)
4.5 2.5
4.0 2.0
3.5 1.5
3.0 1.0
2.5 0.5
2.0
0.0
1.5
-0.5
1.0
-1.0
0.5
-1.5
0.0
-2.0
-0.5
-1.0 -2.5
Jun-16
Jun-09
Jan-10
Jan-17
Mar-11
Dec-05
Sep-07
Apr-08
Nov-08
Aug-10
Oct-11
Dec-12
Sep-14
Apr-15
Nov-15
Aug-17
May-12
Jul-06
Feb-07
Jul-13
Feb-14
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Mar-15
Mar-16
Mar-17
Eurozone inflation Eurozone core inflation China Eurozone (9 month lag)
Source: Bloomberg Source: DNB Markets
On our current estimates, we believe the ECB will continue to purchase assets worth On our estimates, we expect the
EUR60bn/month for the remainder of 2017, as previously guided by the central bank. following purchase pace:
However, we do believe the debate on tapering will come up in the early autumn, and that Rest of 2017: EUR60bn/month
purchases will be reduced as we enter 2018. Thereafter we expect purchases to amount to H1 2018: EUR40bn/month
EUR40bn/month in H1 2018, EUR20bn/month in H2 2018, before slowing down to H2 2018: EUR20bn/month
EUR10bn/month in the first half of 2019. H1 2019: EUR10bn/month
According to these estimates, the purchases will lead to the APP balance peaking at
EUR2.8trn in mid-2019 (figure 7). Assuming that the average proportions seen over the past
12 months continue going forward, purchases under the PSPP will amount to EUR2.30trn, up
EUR714bn from today’s EUR1.59trn.
4
For a full overview of our macroeconomic forecasts, see: http://bit.ly/2ucwI4H
3DNB Markets | ECB asset purchases
27 June 2017
Figure 7: ECB's Asset Purchase Programme – cumulative Figure 8: ECB's Public Sector Purchase Programme -
purchases w/DNB Markets estimate (EURbn) development over time w/DNB Markets estimate (EURbn)
3,000 Current 3,000 Current
2,500 2,500
2,000 2,000
1,500 1,500
1,000 1,000
500 500
- -
Germany France Italy
PSPP CBPP3 CSPP ABSPP Spain Netherlands Belgium
Austria Other countries Supranationals
Source: ECB (underlying data), DNB Markets Credit Research (further calculations) Source: ECB (underlying data), DNB Markets Credit Research (further calculations)
Figure 9: Monthly APP purchases and estimates (EURbn) Figure 10: APP purchases by programme (%)
90 100%
80 90%
70 80%
60 70%
50 60%
50%
40
40%
30
30%
20
20%
10
10%
-
0%
Oct-14
Oct-15
Oct-16
Oct-17
Oct-18
Jul-18
Apr-15
Apr-16
Apr-17
Apr-18
Apr-19
Jan-19
Jan-15
Jul-15
Jan-16
Jul-16
Jan-17
Jul-17
Jan-18
Monthly APP purchases Estimates - PSPP Estimates - CBPP3
Estimates - CSPP Estimates - ABSPP PSPP CBPP3 CSPP ABSPP
Source: ECB (underlying data), DNB Markets Credit Research (further calculations) Source: ECB (underlying data), DNB Markets Credit Research (further calculations)
The ECB has already bought itself more time
As shown in figure 7 above, the vast amounts of assets purchased under APP belong to the Most asset purchases under the APP
PSPP, most of which are sovereign bonds. The bonds are to be purchased according to the take place through the PSPP. Due to
country split in ECB’s capital key, as shown in figure 11. The combination of a large capital weighing of purchases, with Germany
key and relatively modest levels of sovereign debt led investors last year to question whether having a large capital key, approximately
the ECB would find enough PSPP-eligible German sovereign bonds. The situation got worse one-quarter of all purchases are related
owing to ECB’s former guideline of not purchasing bonds whose yield was below the ECB to German debt
deposit rate of minus 0.4%. With the low yields seen in recent years, particularly in the
summer of 2016, this prevented the ECB from purchasing substantial amounts of debt.
Notably, in July 2016, all German sovereign debt with tenors of eight years and lower was
excluded due to this requirement.
Following a revision of the rules in December 2016, the ECB is now free to purchase the Guidelines for purchases were revised in
sovereign bonds, regardless of yield levels. Moreover, the lower eligibility limit for the tenor of late 2016, now permitting the
a bond was reduced from two years to one year. Consequently, the ECB gave itself programme to purchase bonds,
substantially more headroom in terms of eligible debt to purchase. At the same time, it was regardless of yield
announced at the December meeting that overall volume purchased under the APP would be
reduced, from EUR80bn/month to EUR60bn/month, starting in April 2017.
4DNB Markets | ECB asset purchases
27 June 2017
Figure 11: Relative capital key and actual PSPP purchases Figure 12: Germany: Sovereign yield curves (%, y-axis;
(excluding supranationals), % years, x-axis)
30% 1.5
25%
1.0
20%
0.5
15%
10% 0.0
5% -0.5
0%
-1.0
-1.5
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32
Relative capital key Actual purchases (excl. Supranationals)
20-Jun-17 08-Jul-16 Former yield limit (ECB dep rate)
Source: ECB, Bloomberg (underlying data), DNB Markets (further calculations) Source: Bloomberg (underlying data), DNB Markets (further calculations)
Looking to the average tenor of monthly purchases, we see clearly that the ECB made these
amendments to be able to purchase shorter-dated German debt. As evidenced in figure 13,
the average tenor of monthly purchases of German bonds dropped dramatically at the
beginning of 2017, and is substantially below that seen for other European countries.
Interesting to note is that while this shift in purchases should logically lead to a steeper curve
than before, the German curve has moved more or less in sync with other European
countries.
Figure 13: Average tenor of asset purchases, by country Figure 14: Curve steepness, selected sovereigns (%)
(years)
16 3.0%
14
2.5%
12
2.0%
10
8 1.5%
6
1.0%
4
2 0.5%
- 0.0%
Mar-16
Jan-15
Jan-16
Jan-17
Mar-15
Mar-17
Sep-14
Nov-14
Sep-15
Nov-15
Sep-16
Nov-16
May-14
May-15
May-16
May-17
Jul-14
Jul-15
Jul-16
Total Germany France Italy
10y-2y, Germany 10y-2y, France 10y-2y, Italy
Spain Netherlands Belgium Austria
Source: ECB, Bloomberg (underlying data), DNB Markets (further calculations) Source: Bloomberg (underlying data), DNB Markets (further calculations)
Still some headroom, but a shift in purchases may become
necessary
With the prospect of postponed asset purchases from ECB, we believe the question regarding
whether there will be enough eligible bonds available for the PSPP is relevant, especially with
focus on Germany. The first hurdle to answer this question is to find the nominal values of
ECB’s asset purchases to date. The purchased amounts are reported on a market value
basis, which needs to be discounted by average prices in order to find underlying nominal
amounts. Looking at historical sovereign bond prices (using Bloomberg’s sovereign indices),
we find that volume-weighted bond prices have been hovering around 120–125 over the past
two years. Nevertheless, as most bond issues have traded at slightly lower prices (the
average is moved by certain long-dated bonds), we use a discount in our base case
estimates. Clearly, this is also one of the biggest uncertainty factors in the calculation, with
5DNB Markets | ECB asset purchases
27 June 2017
each price figure miss equalling approximately EUR10bn in underlying nominal bond values.
However, please see page 9 for a sensitivity analysis on the topic.
Figure 15: Volume-weighted Figure 16: ECB PSPP holdings - Figure 17: ECB PSPP cumulative
sovereign bond prices Market values and nominal values purchases - Nominal values, by
(EURbn) country (EURbn)
140 2,500 3,000 Current
135 2,500
2,000
130
2,000
1,500
125
1,500
120 1,000
1,000
115 500
500
110
-
Dec-14
Sep-15
Dec-15
Sep-16
Dec-16
Jun-15
Jun-16
Mar-15
Mar-16
Mar-17
-
Oct-14
Nov-16
Dec-18
Feb-18
Aug-15
Apr-17
Sep-17
Jan-16
Jun-16
May-19
Mar-15
Jul-18
Germany France
Italy Spain Market value, actual Germany France
Netherlands Belgium Market value, estimate Italy Spain
Austria Nominal, actual Netherlands Belgium
Nominal, estimate Austria Other countries
Source: Bloomberg (underlying data), DNB Markets (further Source: ECB, Bloomberg (underlying data), DNB Markets Source: ECB, Bloomberg (underlying data), DNB Markets
calculations) (further calculations) (further calculations)
Comparing nominal outstanding eligible volumes to actual purchases by the end of May, we The ECB has purchased approximately
find that the central bank has purchased approximately 23% of Germany’s PSPP eligible debt 23% of German PSPP eligible bonds,
securities, dropping to 20% if including eligible bonds with remaining time to maturity below representing EUR380bn in market value,
one year. The purchased bonds represent EUR380bn in market value, and EUR329bn and EUR329bn in nominal terms
5
nominal terms . Compared to the other countries, Germany has a larger proportion of eligible
regional and local government debt, as well as agency debt securities, giving the ECB some
headroom on purchases. Also of interest, we find that the ECB now owns more than 30% of
the outstanding eligible debt securities issued by the selected international and supranational
agencies. The figure drops to 28% of outstanding volumes when taking into account short-
term securities maturing within one year. We regard this substantial ownership as one of the
reasons why the ECB has raised the maximum ownership in these agency debt securities
from 33% to 50% of outstanding volume in any single issue.
Figure 18: PSPP eligible debt securities (EURbn, lhs), and proportion already purchased (%, rhs)
2,000 40%
1,800 35%
1,600
30%
1,400
1,200 25%
1,000 20%
800 15%
600
10%
400
200 5%
- 0%
Central government Regional and local governments
National agencies Additional debt w/maturity < 1y
Supranationals Proportion of eligible debt purchased already (0-31y), rhs
Proportion of eligible debt purchased already (1-31y), rhs
Source: ECB, Bloomberg (underlying data), DNB Markets (further calculations)
5
As of end of May 2017. Nominal values estimated by DNB Markets Credit Research
6DNB Markets | ECB asset purchases
27 June 2017
Looking ahead, we find that the ECB may experience bund scarcity towards the end of the Substantial amounts yet to be
programme, by our estimation in mid-2019. At that time, we believe the ECB will have purchased.
purchased German debt for a market value of EUR549bn, representing a nominal value of Our estimates (market values):
EUR479bn. Assuming zero debt growth, the country currently has eligible sovereign debt in Purchased already: EUR380bn
the 1–31 year maturity interval amounting to EUR948bn, with additional regional and local Yet to purchase: EUR149bn
government debt of EUR257bn and agency debt of EUR217bn. Assuming that debt securities Total: EUR549bn
6
with less than 1 year to maturity are refinanced with longer-dated paper , the total outstanding
volumes increase from EUR1.42trn to EUR1.67trn. Consequently, nominal purchases of
EUR479bn represent 28.7% of outstanding debt if short-term debt is included and 33.6%
otherwise. Hence, in the former case, the ECB stays within the 33% limit.
However, 33% is the maximum limit, applied to bonds where such ownership would not give We believe the volume-weighted
the central bank a blocking minority position for collective action clauses. In such cases, maximum ownership limit is close to
maximum ownership is limited to 25%. Looking to German bonds, we find that eligible agency 30%
debt and debt issued by regional and local governments seldom contains such clauses.
However, approximately half of German sovereign debt is covered by these, giving a
weighted limit of approximately 30%. Hence, our current estimates imply a potential breach
prior to the end of the programme.
Figure 19: PSPP eligible debt securities and ECB ownership
2,000 50%
1,800
45%
1,600
40%
1,400
35%
1,200
1,000 30%
800
25%
600
20%
400
15%
200
0 10%
Italy France Germany Spain Netherlands Belgium Austria Other Supranationals
Central Regional/Local
Agency Supranationals
Additional debt w/maturity < 1y Purchased
Additional purchases 2017-2019 Proportion today (rhs)
Proportion, mid-2019 (rhs) Proportion, mid-2019 (short-term debt stays short-term, rhs)
Source: ECB, Bloomberg (underlying data), DNB Markets (further calculations)
Substantial uncertainty exists
The estimates are surrounded by several uncertainty factors including, with the largest being
future debt growth and bond prices at which the ECB carries out its PSPP operations.
Debt growth negative, but still not a big problem
Looking at German sovereign debt, we find that its level, in nominal terms, has remained German debt growth is currently in
stable and even falling, for several years. Please note that not all the debt in figure 20 is negative territory
eligible for the PSPP. Nevertheless, there is a risk that the outstanding volume of German
debt could decline over the next two years with recent YOY growth rates being negative for
central, state, and local levels.
6
Analysing the German PSPP eligible debt securities with less than one year to maturity, we find that the majority of volume was originally
issued as longer-term bonds, rather than short-term treasury bills. Consequently, we believe, in a zero debt growth scenario, that these
volumes will be refinanced at longer-term maturities, making them eligible for purchases again. Some of this volume may already been
purchased by the ECB following the removal of the lower yield criteria, in effect from 1 January 2017. For an overview of original maturities of
these short-term debt securities, please see the appendix.
7DNB Markets | ECB asset purchases
27 June 2017
Figure 20: Germany - Government debt (EURm) Figure 21: Germany - Government debt (EURbn), YoY
growth (%)
2,000 14%
1,800 12%
1,600 10%
1,400 8%
1,200 6%
1,000 4%
800 2%
600 0%
400 -2%
200 -4%
0 -6%
Dec-08
Dec-10
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-09
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-06
Dec-10
Dec-14
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-07
Dec-08
Dec-09
Dec-11
Dec-12
Dec-13
Dec-15
Dec-16
Central State Local Central State Local
Source: Bundesbank, DNB Markets Credit Research Source: Bundesbank, DNB Markets Credit Research
While debt growth is not critical, it can affect the calculation by a few percentage points. As Debt growth estimates affect the picture
evidenced in figure 22 (annual debt growth on the x axis), an annual reduction in debt of 2% somewhat, but not significantly
over the next two years would lead to the ECB owning approximately 34.8% of PSPP-eligible
German debt by mid-2019. In the opposite direction, a debt growth of 2% would reduce the
ownership share to approximately 32.5%. With a more realistic limit, at 30%, the ECB would
have to have purchased close to the maximum of the debt with less than one year to maturity
on refinancing, and close to maximum of the debt entering the zero to one year time to
maturity bracket, in order to avoid a breach of internal guidelines.
Figure 22: ECB ownership of German PSPP-eligible debt under various debt growth
scenarios
34.8%
35%
33.6%
33% 32.5%
31%
29.7%
28.7%
29%
27.7%
27%
25%
-2% -1% Base case (flat) 1% 2%
Purchases, % of outstanding [ 1-31y ] Purchases, % of outstanding [ 0-31y ]
Source: ECB, Bloomberg (underlying data), DNB Markets (further calculations)
Price uncertainty affects the picture somewhat
The prices at which the bonds have been, and will be, purchased is important to answer the
question about whether there are enough available bonds or not. This is also a big factor of
uncertainty. To obtain a proxy for historical market prices for purchases, we have used
volume-weighted prices from Bloomberg’s sovereign bond indices. These have further been
revised down somewhat, as some long-dated issues move the average substantially.
Moreover, we have adjusted regional and local government bond prices, as well as agency
bonds, to reflect a slightly lower price level than that seen for German sovereign bonds, partly
due to trading at higher yields with less need for issuance at prices above par. Still, we do not
know at which prices the bonds have been purchased and show three different cases in the
figures below: A high case with prices close similar to the averages seen in Bloomberg’s
8DNB Markets | ECB asset purchases
27 June 2017
indices, a base case with some adjustments, and a low price case with prices closer to Under the various bond price scenarios,
median than average levels. Under the various assumptions, we find that asset purchases in ownership of German PSPP-eligible
mid-2019e vary by about EUR52bn, with EUR500bn of nominal bond volumes purchased in
debt varies from 31.5% to 35.1%, or
the low price case (remember: fixed volume at market prices) and EUR448bn purchased in
26.8% to 29.9% in the case where short-
the high price case. Assuming zero debt growth, the low, base, and high price cases imply
term debt is included
ownership of 29.9%, 28.7%, and 26.8% of German PSPP eligible debt when counting in debt
with less than one year to maturity and 35.1%, 33.6%, and 31.5% ownership otherwise.
Figure 23: Nominal volume purchased in the various cases Figure 24: Nominal volumes purchased compared to
(EURbn) current outstanding volumes (EURbn)
600 1,800
1,600
500
1,400
400 1,200
1,000
300
800
200 600
400
100 200
-
-
Sep-15
Dec-15
Sep-16
Dec-16
Sep-17
Dec-17
Jun-17
Sep-18
Dec-18
Jun-15
Jun-16
Jun-18
Jun-19
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Jun-18
Jun-15
Jun-16
Jun-17
Jun-19
Dec-18
Sep-15
Dec-15
Sep-16
Dec-16
Sep-17
Dec-17
Sep-18
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Outstanding, 0-31y Outstanding, 1-31y Low price case
Low price case Base case High price case
Base case High price case
Source: ECB, Bloomberg (underlying data), DNB Markets (further calculations) Source: ECB, Bloomberg (underlying data), DNB Markets (further calculations)
Matching the three price scenarios with the three debt scenarios, we find that asset
purchases exceed the 33% limit by mid-2019 in all cases of our “low price” scenarios and two
out of three base case scenarios. However, this is in the case that current short-term debt is
not refinanced with longer-dated PSPP eligible securities. In this case, and under the
expectations that ECB owns close to the maximum limit of securities entering the [0–1y time
to maturity] interval, there is enough eligible debt for the programme to not re-allocate
purchases, given that maximum ownership is at 33%. In our base case for prices and with the
above-mentioned assumptions, it is also enough eligible debt, when assuming an ownership
limit of 30%. However, this implies perfect planning from the ECB and that the necessary
bonds are easily available, which we believe will not always be the case.
Figure 25: Low case debt growth (-2% Figure 26: Base case debt growth (0% Figure 27: High case debt growth
p.a.), % of German PSPP-eligible debt p.a.), % of German PSPP-eligible debt (+2% p.a.), % of German PSPP-
held in mid-2019 held in mid-2019 eligible debt held in mid-2019
40% 40% 40%
35% 35% 35%
30% 30% 30%
25% 25% 25%
20% 20% 20%
15% 15% 15%
10% 10% 10%
5% 5% 5%
0% 0% 0%
Low prices Base case High prices Low prices Base case High prices Low prices Base case High prices
Purchases, % of outstanding [ 1-31y ] Purchases, % of outstanding [ 1-31y ] Purchases, % of outstanding [ 1-31y ]
Purchases, % of outstanding [ 0-31y ] Purchases, % of outstanding [ 0-31y ] Purchases, % of outstanding [ 0-31y ]
Source: ECB, Bloomberg (underlying data), DNB Markets Source: ECB, Bloomberg (underlying data), DNB Markets Source: ECB, Bloomberg (underlying data), DNB Markets
(further calculations) (further calculations) (further calculations)
9DNB Markets | ECB asset purchases
27 June 2017
Worst case: Early 2018
In a worst case scenario, with a the “low price” scenario, assumption of limited refinancing of
short-to-long-dated bonds, and an average upper ownership limit closer to 30%, the ECB may
reach its ownership limit as early as H1 2018 (figure 28). Moreover, should the central bank
decide to continue purchases at current pace (EUR60bn/month), this limit could be reached
as early as Q1 2018 (figure 29).
In our base case, and not assuming the ECB has maximized ownership of bonds with less
than one year to maturity, we believe the ECB could reach 30% ownership closer to Q4 2018.
Figure 28: ECB ownership of German PSPP eligible debt in Figure 29: ECB ownership of German PSPP eligible debt in
various price scenarios (%) under current DNB Markets various price scenarios (%) under unchanged purchases of
estimates of reduced asset purchases EUR60bn/month
40% 50%
35% 45%
40%
30%
35%
25% 30%
20% 25%
15% 20%
15%
10%
10%
5% 5%
0% 0%
Jun-18
Jun-15
Jun-16
Jun-17
Jun-19
Jun-16
Jun-15
Sep-15
Dec-15
Sep-16
Dec-16
Sep-17
Dec-17
Sep-18
Dec-18
Jun-17
Jun-18
Jun-19
Sep-15
Dec-15
Sep-16
Dec-16
Sep-17
Dec-17
Sep-18
Dec-18
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Low [1-31y] Base [1-31y] High [1-31y] Low [1-31y] Base [1-31y] High [1-31y]
Low [0-31y] Base [0-31y] High [0-31y] Low [0-31y] Base [0-31y] High [0-31y]
Source: ECB, Bloomberg, DNB Markets Source: ECB, Bloomberg, DNB Markets
We believe the ECB will find a way
Despite worries that there will not be enough German PSPP eligible assets, we believe the The ECB has several options, but given
ECB will find a way to run loose monetary policy if deemed necessary. Given that, on our the remaining time of the programme at
estimates, the central bank would reach the limit towards the end of 2018, the programme is the end of 2018, we believe re-allocating
near its end (remember, we estimate purchases of only EUR10bn/month in 2019). purchases to other parts of the
Consequently, we believe it would be unproblematic for the central bank to re-allocate some APP/PSPP is the most realistic one.
of the purchases to other countries within the PSPP, especially Italy, France, and to a certain This could mean upholding the pressure
extent, Belgium. Moreover, we believe some volumes could be allocated to other parts of the on spreads within EUR covered or other
APP, namely CBPP3 and CSPP. Such a move could keep up the pressure on spreads in corporate bonds, or shifting purchases
EUR-covered bond and corporate sectors. Purchases within these sectors have averaged to Italian or French sovereign bonds
EUR11bn in total over the past 12 months, and by 2019, we estimate that total purchases
under the APP would be only EUR10bn/month.
Another option could be, given the short time remaining and low monthly volume, that the
central bank would amend its 25/33% ownership rule. In our view, this would be more
problematic, as it would entail the central bank gaining a blocking minority share for collective
action clauses. Thus, the cost is relatively large compared to the small effects of re-allocating
purchases to other parts of the APP or PSPP.
Finally, in the case of longer-term asset purchases, in the cases of extended low inflation or
further recessions, recent years have shown that there are many ways to run accommodative
policies, such as Bank of Japan’s purchases of equity ETFs. However, on our estimates for
future purchases, this seems like a less realistic option. Moreover with recent sentiment
shifting to focus on also the negative sides of quantitative easing, prolonged asset purchases
would probably have a hard time gaining political support.
10DNB Markets | ECB asset purchases
27 June 2017
Appendix: APP timeline
Figure 30: APP timeline w/ DNB Markets estimates
Jan
Feb
Mar
Apr
May
Jun
2014
Jul
Aug
10 September 2014: ABSPP and CBPP3 announced
Sep 20 October 2014: CBPP 3 purchases commence
Oct
Nov 21 November 2014: ABSPP purchases commence
Dec
Jan
Feb 22 January 2015: Expanded APP - PSPP introduced
Mar
Apr 9 March 2015: Purchases under PSPP starts, total APP at EUR60bn/month
May
Jun
2015 Jul
Aug
Sep
Oct
Nov 3 December 2015: PSPP expanded to also cover regional and local government issuers
Dec
Jan
Feb
Mar
Apr 21 April 2016: ECB announces CSPP. Total APP increased to EUR80bn/month
May
2016
Jun 8 June 2016: Purchases under CSPP starts
Jul
Aug
Sep
Oct 8 December 2016: Decision to reduce purchases to EUR60bn/month starting in April 2017.
Nov Programme extended to at least December 2017
Dec
Jan
Feb
Mar
Apr April 2017: Monthly purchases reduced to EUR60bn
May
Jun
2017 Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr 1H 2018: Worst case: ECB runs out of PSPP eligible German bonds
May
Jun
2018 Jul
Aug
Sep
Oct 2H 2018: Base case: ECB runs out of PSPP eligible German bonds
Nov
Dec
Jan
Feb
Mar
2019 Apr
May
Mid-2019: Expected end of APP
Jun
Source: DNB Markets
11DNB Markets | ECB asset purchases
27 June 2017
Figure 31: German sovereign debt with less than 1 year to maturity - Original tenors
(EURbn)
60
53
50
50
39
40
30
20
15
10
5
-
1y 2y 5y 7y 10y
Source: Bloomberg (underlying data), DNB Markets (further calculations)
Figure 32: German regional and local debt with less than 1 year to maturity - Original
tenors (EURbn)
18
16.3
16
14
12
9.8
10
8 6.9 7.1
6
4.2
4
2 1.3 0.9 1.2
0.5 0.6 0.5
0.0 0.2 0.0
-
1y 2y 3y 4y 5y 6y 7y 8y 9y 10y 11y 15y 16y 20y
Source: Bloomberg (underlying data), DNB Markets (further calculations)
Figure 33: German agency debt with less than 1 year to maturity - Original tenors
(EURbn)
16
14.2
14
12 10.9
10
8 6.8
6.1
6
4 3.0
1.8
2 1.0
0.4 0.5 0.6
0.0 0.2
-
1y 2y 3y 4y 5y 6y 7y 8y 9y 10y 11y 20y
Source: Bloomberg (underlying data), DNB Markets (further calculations)
12DNB Markets | ECB asset purchases
27 June 2017
Contacts
Credit research
Ole Einar Stokstad Mikael Løkken Gjerding Knut Olav Rønningen
Head of Credit Research, Financials High-Yield Oil/Offshore/Shipping High-Yield Corporates
+47 24 16 90 48 +47 24 16 90 47 +47 24 16 90 45
ole.einar.stokstad@dnb.no mikael.lokken.gjerding@dnb.no knut.olav.ronningen@dnb.no
Rolv Kristian Heitmann Thomas Larsen Kristina Solbakken Lund
Financials & Utilities High-Yield Oil/Offshore/Shipping Investment Grade & High-Yield Corp.
+47 24 16 90 49 +47 24 16 90 44 +47 24 16 90 51
rolv.kristian.heitmann@dnb.no thomas.larsen@dnb.no ksl@dnb.no
Magnus Vie Sundal Martin Børter Erik Öberg
Credit Strategist High-Yield Oil/Offshore/Shipping Investment Grade & High-Yield Corp.
+47 24 16 91 23 +47 24 16 90 46 +46 8 473 48 49
magnus.vie.sundal@dnb.no martin.borter@dnb.no erik.oberg@dnb.se
Shawn Courcelles Fredrik Hössjer
Investment grade
High-Yield Oil/Offshore/Shipping High-Yield Corporates
High-yield +47 24 16 91 28 +46 8 597 912 16
Shawn.courcelles@dnb.no fredrik.hossjer@dnb.no
Fixed income sales Fixed income origination
Oslo Oslo
Jan Krogh-Vennemo jan.vennemo@dnb.no +47 24 16 90 15 Peter Behncke peter.behncke@dnb.no +47 24 16 93 62
Khagani Agaev khagani.agaev@dnb.no +47 24 16 90 61 Jarl H. Brevik jarl.brevik@dnb.no +47 24 16 93 52
Elisabeth Agre elisabeth.agre@dnb.no +47 24 16 90 13 Jørgen B. Engh jorgen.engh@dnb.no +47 23 26 84 85
Joakim Ben Riala joakim.ben.riala@dnb.no +47 24 16 94 16 Knut Eivind Haaland knut.eivind.haaland@dnb.no +47 24 16 93 61
Alain Britt-Côté alain.britt-cote@dnb.no +47 24 16 90 09 Haakon Magne Ore haakon.magne.ore@dnb.no +47 24 16 93 49
Fredrik T. Eliassen fredrik.thorso.elisassen@dnb.no +47 24 16 91 03 Kristian Ottosen kristian.ottosen@dnb.no +47 24 16 93 56
Nils-Jørgen Fimland nils-jorgen.fimland@dnb.no +47 24 16 90 23 Preben Stray preben.stray@dnb.no +47 24 16 93 63
Morten Fornes morten.fornes@dnb.no +47 24 16 90 18 Henning Sørlie henning.sorlie@dnb.no +47 24 16 93 57
Hedda Giæver hedda.giaever@dnb.no +47 24 16 91 05 Frode Sævig frode.savig@dnb.no +47 24 16 93 55
Rune B. Liholt rune.liholt@dnb.no +47 24 16 90 25 Hans-Christian Vatne h.vatne@dnb.no +47 976 56 353
De Cong Lu de.cong.lu@dnb.no +47 24 16 90 12
Morten Madsen morten.madsen@dnb.no +47 24 16 90 22
Christian Malde christian.malde@dnb.no +47 24 16 90 26 London
Trond S. Marthinsen trond.marthinsen@dnb.no +47 24 16 90 19 Padraig Harrington padraig.harrington@dnb.no +44 20 7621 6021
Dag Bernt Nilsen dag.nilsen@dnb.no +47 24 16 90 11 Stuart Fidler stuart.fidler@dnb.no +44 20 7621 6129
Erich Normann erich.normann@dnb.no +47 24 16 91 13 JoJo Thirasilpa jojo.thirasilpa@dnb.no +44 20 7621 6056
Jannis Rikvold jannis.rikvold@dnb.no +47 24 16 90 16
Petter M. Rishovd petter.rishovd@dnb.no +47 24 16 90 21
Hanna Tronrud hanna.tronrud@dnb.no +47 24 16 90 14 New York / Houston
Robert Christensen robert.christensen@dnb.no +1 212 551 9831
Daniel Hochstadt daniel.hochstadt@dnb.no +1 212 681 3990
Oslo – Fixed Income and Real Estate
Frank Rognes frank.rognes@dnb.no +47 24 16 91 15
Bård Løkken bard.lokken@dnb.no +47 73 87 49 85 Singapore
Harald Taarud harald.taarud@dnb.no +47 61 24 79 57 Joachim Skorge joachim.skorge@dnb.no +65 6212 06 70
Mattis Hystad mattis.hystad@dnb.no +65 6212 06 97
New York
Lars Nyhus lars.nyhus@dnb.no +1 212 681 3911 Stockholm
Ole Martin Bosåen ole.martin.bosaen@dnb.no +1 212 681 3918 Karl Johan Kulling karljohan.kulling@dnb.se +46 8 473 48 67
John Parker john.parker@dnb.no +1 212 551 9852 Johan Edin johan.edin@dnb.se +46 76 466 69 21
Brian Mcevilly brian.mcevilly@dnb.no +1 212 551 9897 Henrik Kansmark henrik.kansmark@dnb.se +46 76 466 69 22
Vincenzo Zarrillo vincenzo.zarrillo@dnb.no +1 212 551 9855 Kristofer Pousette kristofer.pousette@dnb.se +46 8 473 48 77
Fixed income syndicate desk
Singapore Oslo
Chee Keen Ng chee.keen.ng@dnbbank.com +65 6220 2122 Pål Vammervold pal.vammervold@dnb.no +47 24 16 93 68
Eleana Mei Ling Chan eleana.chan@dnbbank.com +65 6220 7717 Pål Hegseth pal.hegseth@dnb.no +47 24 16 93 54
Jerome Teo jerome.teo@dnbbank.com +65 6223 1720
Stockholm
Viktor Jansson viktor.jansson@dnb.se +46 8 473 48 71
Nina Ahlstrand nina.ahlstrand@dnb.se + 46 8 473 48 78
Daniel Andersson daniel.andersson@dnb.se +46 8 473 48 75
Fredrik Boklund fredrik.boklund@dnb.se + 46 8 597 91 215
Jamil Ekring jamil.ekring@dnb.se +46 8 473 48 21
Robert Fredholm robert.fredholm@dnb.se +46 8 473 48 59
Arin Kamangar arin.kamangar@dnb.se +46 8 473 48 34
Pontus Kylander pontus.kylander@dnb.se +46 8 473 48 73
Camilla Ohlsson camilla.ohlsson@dnb.se + 46 8 597 912 17
Ulf Pettersson ulf.pettersson@dnb.no +46 8 473 48 38
13DNB Markets | ECB asset purchases
27 June 2017
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14DNB Markets | ECB asset purchases
27 June 2017
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