ECB may run out of eligible bonds as yields drop on QE
The European Central Bank could run out of eligible bonds to buy from Eurozone countries, including Ireland, because yields have turned negative, Moody's Investor Service warned.
To boost the Eurozone economy and prevent deflation from setting in, the ECB announced in January it would buy €60bn of assets a month, focusing mainly on sovereign bonds. Purchases began last month.
One of the conditions of the so-called quantitative easing plan is that the yields on eligible bonds can't fall below -0.2pc.
But ironically, as a consequence of the programme's announcement, that is already happening and a number of government bonds have become ineligible, Moody's noted in a report published yesterday.
Germany's 10-year yields dropped to a record yesterday. Benchmark German 10-year yields fell two basis points, or 0.02 percentage point, to 0.14pc.
The yield on Irish 10-year debt had fallen to 0.676pc by mid-afternoon yesterday. That compares with a year-to-date high of 1.369pc on January 8.
Moody's predicts the ECB will run out of eligible bonds from Ireland in March, well ahead of the intended completion of the programme in September 2016, and run out of bonds from Germany by September of this year.
"Amongst the largest markets, the QE programme could run out of eligible bonds from the governments of the Netherlands, Finland, France, Austria, Belgium, Ireland and Portugal," wrote Marie Diron, senior vice president for credit policy at Moody's Investor Service.
"Among the major euro-area economies and government bond markets, only Spanish and Italian government bonds would be available until the end of the programme."
Moody's said that unless QE is successful in raising growth and inflation expectations, and in turn, yields, the ECB might consider easing the rules, including changing the mix of the types of bonds purchased. But that might push yields down further, Moody's said. "However, such changes would probably fuel further declines in bond yields, partially offsetting their impact on the amount of eligible bonds."
Moody's said that even for Spain and Italy, the assumed fall in yields implies that from June of July next year, only bonds with a maturity of more than 10 years would be eligible. "In this scenario, QE purchases would fall short of the €1.1 trillion target by around €235bn to €240bn, or around 22pc." About 28pc of German bonds within the two to 30-year range have yields below the ECB's minus 0.2pc deposit rate, according to Moody's, making them ineligible for QE. This share was 5pc when the ECB announced the mass bond buying in January.
ECB President Mario Draghi has said the plan will boost consumer prices and spur credit supply. The ECB's Governing Council will hold a monetary-policy meeting in Frankfurt today to assess its QE strategy.