March 29, 2018 / 9:09 AM / 4 months ago

GRAPHIC-Govt bond markets set for 23 bln-euro ECB redemption lift in April

* ECB bond redemptions to jump in April

* Reinvestment flows picking up

* Growing in significance as ECB nears stimulus exit

By Dhara Ranasinghe

LONDON, March 29 (Reuters) - Redemptions from maturing government bonds held by the European Central Bank will jump in April to their highest this year, with reinvestments providing an extra buffer to bond markets as the central bank moves towards exiting aggressive stimulus.

ECB estimates show monthly redemptions from government bonds will rise to almost 23 billion euros ($28.5 billion) next month from under 4 billion euros in March.

This means that total asset purchases in April could be much higher than in the previous three months of the year and potentially top 50 billion euros if the ECB reinvests the full sum from redeeming bonds.

For interactive chart: tmsnrt.rs/2GaCNsL

Since 2015, the ECB has accumulated bonds in a stimulus scheme to lift inflation and the economy.

This year sees the first significant pickup in redemptions from the bonds the bank holds. It is not required to immediately reinvest these funds, but the ECB has made it clear that the cash will flow back into bond markets - capping a rise in borrowing costs.

With the end of stimulus in sight, reinvestment flows are becoming increasingly important to government bonds. ECB monthly purchases were halved to 30 billion euros in January and are expected to end this year. A rise in interest rates is still seen as more than a year away.

“April is the first month where we really see reinvestment flows come up to speed,” said Patrick O’Donnell, investment manager at Aberdeen Asset Management.

“Overall volatility in euro zone government bonds remains low because there is one significant buyer in town, the ECB, and it doesn’t look in a hurry to change forward guidance so the front end of the curve remains suppressed.”

Two-year bond yields in euro zone benchmark issuer Germany are mired in negative territory at minus 0.59 percent and longer-dated bond yields are near 2-1/2 month lows.

German 10-year bond yields are set to end March with their biggest monthly fall since August, down 16 basis points.

But they are up around 8 bps for the first quarter, showing that debt markets have yet to fully recover from heavy selling early in 2018 on worries about a turn in central bank policy.

Reinvestment flows could aid that rebound - especially in powerhouse economy Germany where 2018 reinvestment flows are forecast to be the strongest.

In addition, Germany plans to cut its second-quarter debt issuance by two billion euros after a surge in tax revenue, adding to a shortage of much-coveted German debt which in turn anchors bond yields.

Italy is expected to see lower reinvestment flows this year than Germany and France and that could make its bond market more vulnerable to selling pressure, said analysts.

Italian bonds have proved resilient to political risks at home, where following an inconclusive March 4 election the prospect of coalition between the far-right League and anti-establishment 5-Star Movement have grown.

“The lack of reinvestment in Italy in April, according to our calculations, means that this market should lag other major European issuers,” said Mizuho rates strategist Antoine Bouvet.

“This adds to adverse headline risks with populist parties showing signs of being willing to work together, and to the long-term risk of economic and fiscal divergence between Italy and other large issuers.”

For an interactive chart: tmsnrt.rs/2GcRZWz

Reporting by Dhara Ranasinghe; editing by Andrew Roche

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