Citi is out with its reaction to the bond-buying plan ECB President Mario Draghi revealed at the central bank’s big meeting earlier today.Rates strategist Jamie Searle asks some pointed questions about the new program (aka the OMT) – namely, whether it’s robust enough to avoid the same fate that the ECB’s previous attempts at bond buying (via the SMP) did, where sovereign bond yields in Italy and Spain ended up moving higher after implementation.
Searle says the new plan could be dangerous:
Will OMTs work beyond the near-term?
OMTs are an important step towards building an adequate firewall in case of Greek exit. Moreover, the willingness of the ECB to push the boundaries of their mandate boosts confidence in European Government bond markets. However, the ECB’s intervention only buys time and in itself is obviously not a solution to the crisis. The economic backdrop remains dire, and there will be plenty more work for the ECB to do in the months ahead.
The SMP is dead. Long live the OMT.
Moreover, while there are clear differences between OMTs and the now defunct SMP (conditionality, duration and pari passu status), the basic principle of a secondary market bond buying programme is the same. The SMP initially triggered a sharp move lower in periphery yields, similar to the recent rally, but failed to have a lasting impact.
Investors may be willing to buy the front-end in anticipation of ECB buying, but are they willing to hold those positions? There is a danger that investors may be more inclined to sell to the ECB rather than buy with the ECB. Moreover, the ECB may be hoping to do most of the work with words in the hope that the buying can be kept to a minimum. The market may yet be willing to put this to the test.
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