There has been a lot of concern regarding the potential “unlimited” nature of the ECB’s new bond market intervention plan.The worry is that the ECB could end up with a balance sheet packed with sovereign debt that no one else wants as everyone rushes to sell to the ECB once the central bank starts buying.
Barclays, like many other research shops, told clients in a note that the details of the ECB’s new bond-buying plan were mostly what they were expecting.
However, Barclays economists led by Julian Callow don’t really see that as much of a risk at all.
In the note, they give three reasons why they think the ECB won’t be on the hook for much in Spain:
We would be surprised if the ECB really needs to buy a lot of short end Spanish bonds to keep yields low for a few reasons.
First, the current ownership of the market: we estimate there are about €110bn of bonds held by foreigners across maturities (compared with €180bn before the SMP); only about 23% of the total Spanish bond market is between 1 and 3 years of maturity, so the short-end bonds held by foreigners probably amount to about €25bn-50bn (assuming the same proportion or, more unlikely, double the concentration, in short-end bonds).
Second, the new net total bond issuance in Spain is likely to be about €50bn in the coming years (broadly speaking, it is the Spanish deficit target, which will be subject to conditionality); assuming no major changes in issuance patterns (something Mr Draghi said they would monitor), about €10-15bn of that would be in the 1-3 year bucket.
Third, the general outlook for rates will be pushing investors to gradually take more risk if there is a credible backstop: this is a process that has started already but could gather pace; it could, over time, push investors to take more credit and maturity risk.
Morgan Stanley interest rate strategists more or less agree. In a note to clients today, Laurence Mutkin wrote that the ECB’s new plan gives them “ample firepower” – in the short term, at least.
Here’s a chart from the Morgan Stanley note illustrating the composition of the Spanish government bond market, as Barclays described above:
Photo: Morgan Stanley
Here’s Mutkin’s take:
In our view, that the ECB has ample firepower to take yields as low as it likes. We calculate that outstanding Spanish government bonds of 1-3 years maturity total some €177bn, of which the amount held by non-official foreign holders is about €44bn (Exhibit D1). For Italy (BTPs), the comparable numbers we calculate are €309bn and €93bn.
For comparison, the ECB bought an estimated €110bn BTPs and €30bn Bonos during the SMP. So we think that the ECB will be well able to move market yields to wherever it chooses.
Nomura economists definitely do not share this view – today they put out the most pessimistic take we’ve seen on the ECB’s new plan. Nomura’s Incredibly Bearish Take On Why The ECB Only Bought 3 Months At Most >
OTHER REACTIONS TO THE ECB’S NEW BOND-BUYING PLAN:
- CITI: How The ECB’s New Rescue Plan Could Go All Wrong >
- JP MORGAN: The ECB’s New Plan Will Change The Course Of The Euro Crisis >
- GOLDMAN: Spain Will Formally Request A Bailout Next Weekend >
- BofA: More Bad Than Good Came Out Of The Big ECB Announcement >
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