Azernews.Az

By Bloomberg

With the European Central Bank facing a shrinking universe of government bonds it can buy under its quantitative-easing program, rising prices may help reduce the amount of securities it needs to achieve its goal.

Price gains that have pushed yields from Austria to Spain to record lows since the ECB started buying securities on Monday will enable the central bank to get closer to its target of 60 billion euros ($64 billion) a month, while acquiring fewer bonds than would be implied by the face value.

While about a quarter of German bonds that have maturities qualifying them for the program already are ineligible because yields are less than the central bank’s deposit rate of minus 0.20 percent, price increases since the start of QE mean that “the amount the ECB can buy rises,” Jan von Gerich, chief strategist at Nordea Bank AB in Helsinki, wrote in a client note on Thursday.

The ECB has said it will apportion its debt purchases among euro-area countries roughly in line with the amount of funds each nation’s central bank has contributed to the ECB’s own capital, a ratio known as the capital key. That means the ECB should acquire about 200 billion euros of German debt by September 2016, when the program is scheduled to end.

ECB Restrictions

Yet restrictions based on yield and the ECB’s limit on owning no more than 25 percent of any single sovereign security would reduce what the central bank can buy to 135 billion euros of German debt, Nordea’s von Gerich wrote.

“True, these bonds trade well above their par value, meaning in market-value terms the amount the ECB can buy rises to 175 billion euros,” he wrote.

The ECB and national central banks will continue to buy about 3 billion euros of debt a day, Executive Board member Benoit Coeure said in Paris on Thursday. Coeure said in a speech on Tuesday in Frankfurt that while there’ll be a scarcity of bonds to purchase, there’ll still be enough for the central bank to meet its targets.

Governing Council member Jens Weidmann, who opposed QE, said on Thursday in Frankfurt that the outlook for the region’s economy was improving, meaning there was no need for more stimulus. Weidmann is president of Germany’s Bundesbank.

While the higher market value of bonds should make it “somewhat easier” for the ECB to meet its targets, this effect may be countered by an increase in the number of securities that are pushed below minus 0.2 percent, where the ECB’s own rules mean it can’t buy, according to Michael Leister, a senior rates strategist at Commerzbank AG in Frankfurt.

“These are two opposing factors,” Leister said in a telephone interview on Thursday. “On balance, the overall price should indeed make it somewhat easier” for the ECB to reach its goal, he said.