(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 months.
Markets and investors appear sanguine over the potential threat for now, especially when it comes to the corporate bond market.
“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 substantially wider.”
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 disappeared.
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 Matthew Davies)
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