(This story was originally published on Friday March 31 in IFR,
a Thomson Reuters publication.)
* Markets poised as ECB scales back QE
* Biggest impact expected in H2
By Matt Painvin and Laura Benitez
LONDON, April 3 (IFR) - As the European Central Bank embarks
on scaling back its extraordinarily accommodative monetary
policy, capital markets professionals are looking beyond the
imminent €20bn monthly reduction in bond-buying to a new
environment without stimulus.
Fears in the markets are focused on a potential repricing of
credit spreads, an unwinding of negative yields, and the removal
of the backstop bid for fixed income.
The central bank will at some point have to further cut its
remaining €60bn of monthly purchases, but there is considerable
uncertainty about when that will begin.
“The market is already focused on the second half of year,”
said a buyside investment analyst. “The likely playbook is for
quantitative easing to be significantly reduced from September
before the depo rate is raised in 2018 or later.”
The ECB’s central challenge is to avoid the type of
volatility experienced in the spring of 2013 when the US Federal
Reserve indicated it wanted to reduce its bond-buying programme
at some point in the future. That so-called “taper tantrum” led
to a 135bp spike in 10-year US Treasury yields in just three
Markets and investors appear sanguine over the potential
threat for now, especially when it comes to the corporate bond
“I don’t think that the ECB scaling back its purchases will
have a huge effect on the corporate market and we’re not
expecting spreads to blow out wider,” said Roger Webb, Aberdeen
Asset Management’s head of European credit.
Credit spreads ground close to all-time lows after the ECB
began its corporate sector purchase programme in June 2016. This
followed the bank increasing its monthly asset purchases to
€80bn in March.
The ECB has bought almost €74bn of corporate paper since
June but there are widespread expectations it will wind
purchases back slowly, which should help stabilise spreads.
Analysts at Barclays do not expect a material decline in
corporate purchases in the near term, anticipating a reduction
to €35bn-€40bn in the first half of 2018 and €15bn-€20bn in the
second half of that year.
Whether the reduction will have an impact on spreads will
depend on timing, Webb said.
“We’re not anticipating the ECB to start pulling back from
its corporate QE programme heavily anytime soon. It’s not in the
bank’s interest to shock the market and send spreads
The relaxed tone may reflect the market’s experience of a
gentle slowdown in the ECB’s corporate purchases, which have
fallen in recent weeks. Last week’s purchases of €1.5bn were the
lowest weekly number since December 2016.
Late last year, the central bank announced that the average
monthly amount of its overall asset purchases will return to
€60bn from April 2017 as the risk of deflation had largely
This started to fuel suspicions that QE is coming to an end
and ignited a repricing of rates, with 10-year German yields
55bp off their summer 2016 low of -0.18%.
The ECB backstop bid has crushed short-end yields,
contributing to negative yields on the German curve all the way
out to the eight-year maturity.
Given the two-year Schatz at -0.74%, public sector debt
appears most vulnerable to the ECB pulling the plug after
€1.4trn of purchases, as of February 2017 - around 85% of the
total asset purchase programme.
However, QE has not been the sole driver of negative yields
in Europe. Regulatory constraints and strong demand for
defensive assets have also weighed in.
“It is difficult to predict what the real impact of the ECB
is on short bonds,” said the SSA banker. “Any sell-off will be
limited by the world’s structural need for collateral.”
A new ancillary effect of QE could also temper any weakness.
As the programme turns two years old, the first reinvestments
will help to offset the nominal reduction in purchases.
“There is no good estimate of the amount of cash coming back
to the market, but the power of reinvestments will start to be
felt in the coming weeks,” said the SSA banker.
(Reporting by Matt Painvin and Laura Benitez, editing by