ECB will continue to buy Bonds
2022.12.13 07:50
ECB will continue to buy Bonds
Budrigannews.com – Soon, the European Central Bank will be able to live without purchasing bonds. Thursday, President Christine Lagarde will explain how ratemakers intend to reduce the bank’s 5-trillion-euro portfolio of corporate and government bonds. Europe’s so-called quantitative tightening (QT) should be slow due to rising yields and a still fragile euro zone.
Frankfurt is behind on QT. In February, the Bank of England began reducing its portfolio of government bonds, and in June, the Federal Reserve followed suit.
The European Central Bank’s (ECB) pre-pandemic asset purchase program, which is worth 3.4 trillion euros, is not expected to begin selling assets; rather, it may simply stop replacing bonds that are approaching maturity. Market conditions suggest a more prudent course of action, despite calls for a quick run-off from hawks like Bundesbank head Joachim Nagel.
Even though governments in the Euro Area continue to have significant fiscal deficits, the end of bond-buying will force investors such as banks and insurers to purchase additional debt. As a result, bond yields will rise. According to Bank of America, the private sector will have to take on a record 420 billion euros of debt from governments and institutions in the euro zone in 2023, including repayments. This figure is the highest since the financial crisis of 2008
Investors may be more concerned about indebted sovereigns like Italy as a result of higher yields, which may exacerbate the recession in the euro area. Before quantitative easing began, the spread between 10-year Italian debt and German bunds was around 210 basis points, 20 basis points higher than it is now. Analysts at Goldman Sachs anticipate that German 10-year yields will rise to 2.75 percent in March 2023, up from the current 1.95 percent. This suggests that Italian funding costs may exceed 5% without bond purchases. According to Capital Economics, markets may begin to doubt the nation’s ability to repay its debt at that point.
Because of this, the ECB is likely to move slowly. Its bond portfolio would shrink by 287 billion euros in the coming year if it stopped reinvesting all debt that was reaching maturity as of March. Instead, analysts at Barclays anticipate that the bank will continue to reinvest approximately 75% of principal payments from maturing bonds, reducing that percentage to 50% in the third quarter and 25% in the final three months of 2023. If this is the case, the ECB’s portfolio would shrink by only 132 billion euros, or barely 2.6% of the total, in the coming year.
The Transmission Protection Instrument is an emergency bond-buying program that the ECB can implement in the event that bond yields rise. However, such a tool might amplify tensions on the governing council, which would further agitate markets. The ECB is forced to slowly remove the punchbowl due to the real dangers of a disorderly exit.
On December 15, as it intensifies efforts to reduce inflation in the euro area, the European Central Bank will provide an explanation regarding how it will liquidate its 5-trillion-euro bond portfolio.
The central bank hopes that the so-called “quantitative tightening,” or QT, will slow down demand for goods and services in the 19 nations that share a single currency in addition to the ongoing series of increases in interest rates.
The ECB’s nearly a decade of monetary stimulus during the euro zone’s numerous crises has been reversed in this change.
