Draghi’s Plan to Buy Regional Bonds Seen as Mere Side Dish

Industry:    2015-12-04

The European Central Bank’s decision to buy regional and municipal debt may do little to enhance its quantitative-easing program. The lion’s share of those bonds come from Germany’s 16 Federal states and Spain’s autonomous communities. While making those securities available for purchase may alleviate pinch points for the ECB, strategists say it’s unlikely to be more than a sideshow to the central bank’s main government-debt acquisitions. “It is a side dish,” said Richard McGuire, London-based head of rates strategy at Rabobank International. “The main course will be euro-zone government bond” purchases, he said in comments before the ECB decision. As he seeks to raise inflation as quickly as possible, ECB President Mario Draghi said on Thursday he’d expand the QE plan to include the regional debt and extend it until at least March 2017, sticking to the buying pace of 60 billion euros ($65 billion) a month. While the central bank maintains that so far it hasn’t struggled to find bonds to buy, some shorter-maturity sovereign debt yields less than the ECB’s threshold for purchases, even after the central bank lowered it to minus 0.3 percent. Number Crunching The total size of the euro area’s regional bond market is around 377 billion euros, of which 292 billion euros is from Germany, according to Rabobank estimates. Of those German securities, about 100 billion euros may be unavailable for the ECB because they mature in less than two years, McGuire said, and after applying the ECB’s rules on the number of bonds it can buy per issue, the total potential purchases drop to about 62 billion euros. Barclays Plc sees even fewer regional securities available for the ECB, with eligible bonds estimated at 129 billion euros, leaving only 43 billion euros for purchase. “Only German states and Spanish regions issue debt in benchmark format in meaningful size, apart from a few individual cases,” analysts at Barclays, including Jussi Harju, a Frankfurt-based strategist wrote in a note. Reluctant Sellers And the ECB may also have to contend with unwilling sellers. Holders of German regional bonds in particular “are mostly buy-and-hold investors, which also on the basis of the zero-risk weighting, would like to stick to their Laender investments,” analysts at ABN Amro Bank NV, including Nick Kounis, the Amsterdam-based head of macro research, wrote in a note to clients. The municipal bonds market is smaller still, according to Rabobank, which estimates its total size at 33.5 billion euros.

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