ECB’s reinvestment policy barely getting under way - Natixis

Analysts at Natixis explain that April also marks a turning point, but this time for the European Central Bank (ECB), with the start of its reinvestment policy.

Key Quotes

“Given the reduction in the size of the APP from this month onwards, the question is whether reinvestments by NCB will be enough to offset the €20bn reduction in asset purchases. To estimate the impact of this reinvestment policy, we considered notably bonds maturing in 2017 that are currently available for repo.”

“Logically, govies account for the great majority of the securities being loaned, as they represent 96% of total outstandings and 92% of bonds eligible for purchase assuming that holding constraints for each programme reach their ceiling. The CSPP, which is also concerned by the reinvestment policy, represents only 4% of outstandings, but this could rise as high as 8% were holding levels to reach their ceiling (70% for the CSPP vs. 33% for the PSPP excluding supranationals).”

“All in all, based on outstandings as set out in the table alongside, maximum reinvestments this year (assuming holding levels at their ceiling) would total €161bn, which represents €17.9bn a month on average.”

“In terms of geographical breakdown, the four most represented countries are logically the Eurozone’s four largest markets, namely France (31% of total), Italy (26%), Germany (17%) and Spain (11%). Note that the first two countries are overrepresented compared with their weight in the ECB capital key (this even after removing supranationals and corporates held in portfolio), whereas Germany and Spain are underrepresented. Taking a closer look at the sovereign segment, what will be observed is that there is a quite significant concentration of reinvestments in July (€87bn) and October (€92bn), due notably to the redemptions scheduled in France.”

“In the best of cases, reinvestments this year will near €119bn in the sovereign market, with France and Italy, when taken in aggregate, accounting for more than half this amount. However, inasmuch as the bonds in question were eligible for purchase during only 9 months in 2015 (for those trading above the ECB’s deposit rate) and since NCB favoured long-dated issues, it is very likely that actual holding levels are some way off the 33% ceiling on which the above calculations are based.”

“In reality, it is likely that bond holdings are nearer 5%, possibly 10% in the best of cases, which implies that reinvestments in 2017 will range from €18bn to €36bn, or at most €4bn a month on average. This amount would clearly not be enough to offset the €20bn reduction in asset purchases under the APP and, by extension, purchases under the PSPP (the reduction in asset purchases being likely to be of the order of €17bn). The bottom line is that one should not expect the ECB’s reinvestment policy to work a miracle in 2017.”