Courtesy of Mish.
In the wake of ECB’s €60 billion a month QE madness (see “QE already Working” Says IMF Lagarde; Ho-Hum Details Announced; Gold the Place to Be), one might be wondering what it may do to European bond yields.
German 10-Year Bond Yield
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Since September of 2013, yield on the German 10-year bond has plunged from around 2% to 0.367%.
ECB Risks German Bonds Mismatch Exceeding 100 Billion Euros
With €720 billion annual asset purchases, a huge portion of the bonds the ECB buys will be German.
Bloomberg explains ECB Risks German Bonds Mismatch Exceeding 100 Billion Euros.
[Of the 60 billion monthly asset purchases], about 45 billion euros probably would be sovereign debt, according to a central bank official, equating to more than 100 billion euros of German securities this year, based on purchases being conducted in proportion to euro-zone members’ contributions to the ECB’s capital. That would shrink the tradable market for German bonds in a year when the debt agency already planned to reduce the amount of conventional bonds outstanding by 8 billion euros.
“It’s going to cause a huge shock to the supply-demand balance in the European government-debt market,” Anthony Doyle, investment director at M&G Group Plc in London, said before the ECB’s decision was announced. “We might not be too far off the German bund market looking like the Swiss one, with a negative yield out to 10 years. It’s pretty crazy.”
ECB buying will be carried out in line with the capital key, Draghi said, which is a measure roughly in proportion to the size of each nation’s economy. Adjusted for non-euro-region central banks, that works out as a 25.6 percent share for Germany, according to calculations based on data on the ECB’s website.
If the ECB purchases about 450 billion euros of sovereign bonds over 10 months, about 115 billion euros would be earmarked for German debt. The exact amount has yet to be officially specified because the ECB plans to include debt of agencies and European institutions, as well as asset-backed securities and covered bonds in its purchases. As of Dec. 31, Germany had 1.16 trillion euros of tradable securities. …
