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Why European Bondholders Refuse To Sell To The ECB
Just weeks before Mario Draghi's "whatever it takes" trillion-euro Q€ bond-buying-fest is set to come true, The ECB faces a problem they likely never expected - unwilling sellers. On the heels of our analysis showing central banks will monetize over 100% of government bond issuance this year, Reuters reports that mere weeks before the ECB begins their program, banks, pension funds and insurers across the continent are hoarding them for regulatory or accounting reasons. "We prefer to hold on to them," said Antoine Lissowski, deputy CEO at French insurer CNP Assurances. "The ECB's policy ... is reaching its limits now."
Yet another unintended consequence of massive monetary manipulation... monetizing >100% of issuance in 2015; the net issuance of government debt in 2015, which will not only be the lowest in history, but - for the first time ever - be negative, explains all one needs to know.
Has, as Reuters reports, left European asset managers forced to hold what they have (and unwilling to sell to the ECB)...
At the height of the euro zone debt crisis in 2012, ECB President Mario Draghi's problem was how to convince investors to hold on to European bonds. Now he faces a struggle to make them sell.
...
That may complicate implementation of the quantitative easing program, aimed at reviving growth and inflation in the euro zone. The ECB might have to pay way above market prices, or take additional measures to encourage investors to sell.
"We prefer to hold on to them," said Antoine Lissowski, deputy CEO at French insurer CNP Assurances. "The ECB's policy ... is reaching its limits now."
Banks, which buy mainly short-term bonds, use government debt as a liquidity buffer. Selling would force them to invest in other assets, for which -- unlike government bonds -- regulators ask banks to set cash aside as a precaution. Alternatively, they can deposit money with the ECB, at a discouraging interest rate of minus 0.20 percent.
Insurers and pension funds typically buy long-term debt. They could make hefty profits selling to the ECB. But the money would have to be re-invested in other bonds whose yields would be much lower than their long-term commitments to clients -- a regulatory no-no.
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"If we were to sell bonds, we would make huge capital gains, but we will then have to reinvest that money at a yield of 0.5 percent, set against liabilities at 3.50-3.75 (percent)," said Bart de Smet, the CEO of Belgian insurer Ageas.
Dutch banks ING and Rabobank, Spain's Bankinter and rescued lender Bankia and France's BNP Paribas said they were unlikely to sell when the ECB comes knocking.
"The volume of sovereign bonds we own at the moment is not linked to monetary policy," BNP Paribas deputy CEO Philippe Bordenave said. "It's linked to the regulation."
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But everything has a price. RBS strategists see a 40 percent chance that ECB purchases would help turn German 10-year Bund yields negative this year.
"There's a lack of bonds to meet current demand globally, so it's going to be difficult to see a lot of sellers," said Patrick O'Donnell, portfolio manager at Aberdeen Asset Management, who does not plan to sell.
"The risk is that if the ECB is serious about buying at the rate of 60 billion a month, the price impact could be quite material."
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Perhaps most ironically, if Greece were to leave the euro, selling pressure might increase, which would thus enable The ECB to print moar, monetize moar, and buy moar bonds...
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Money will flow to the DAX of course but it's up 33% since October and already overbought, so it will be interesting to see how much further it can rise. I was thinking the Grexit debacle might help to shed 10% or so before another long phase, but that didn't happen so I'm eagerly waiting to see what happens next
Better buy stocks then.......
The world's investable assets are dwindling quick. Supply and demand.
So Hank Paulson did at least demand...and get...equity stakes in the Bailout Tycoons' enterprises.
He didn't just give away the 700 plus billion.
When that market "recovered" (after the Fed nuked the dollar) Treasury then sold.
I don't find this behavior surprising at all.
If you made commitments based on 4-5% returns assumptions you CAN NOT ACCEPT 1% yields. Even if the short term gain from selling your current bond porfolio to the ECB is significant.
Please do not mistake this for some return to rational (significantly above zero) interest rates. THIS ISN'T THAT. This is contractual obligations feeling the strain of YEARS of central banks repressing interest rates. Not to mention that we've been in a depression since 2008.
Pension funds, annuities and their ilk make benefits commitments built on interest rate assumptions. Commitments and assumptions were set years ago. Reality has come in well below those assumptions.
This will never grab big headlines and few will understand it until pension funds start getting 'Detroit-ed'. Not just in broke, corrupt, terminally-under-funded shit holes, but across large swaths of the "defined benefit" world, both private and governmental.
This is how things come apart when long term promises can't be met. This is when "but I was promised!" starts to meet the brick wall of reality.
To MILLIONS of people this is actually a very big, very important deal. It's a shame nobody will remember this article, nor my tiny spit of a comment on it by the time reality bites them in the ass.
NoDebt, Thanks for sharing your thoughts. A great explanation. Oh are we screwed or what!?!
If you're depending on the past promises of others in todays world, yes, you are well and truly screwed.
How about hoarding them because the ones they got now that they bought a while ago have nice, reasonably large, attractive, positive, paying coupons on them in the land of negative interest rates.
I get a kick out of the fact that it is "regulation" that forces these entities to buy this horrible debt. I wish I had the abity to force banks to buy money I owe at ultra low or even negitive interest rates. What a joke.
Though the polish needs some work, this is still be best introduction and overview of where we are that I have seen and I have read plenty on the subject. Certainly worth a look:
http://debtcrash.blogspot.com/
bwh1214,
For those who would rather watch than read; the best educational video on the subject ever produced:
https://www.youtube.com/watch?v=iFDe5kUUyT0
A gain of 30% covers many years of interest at 3%. They real reason is that selling would require they deleverage across the board.
If it was 30%, yes, it might work. But what if it's only a gain of 8%? (Which it is)
Besides, the modest 4-5% returns assumptions I mentioned are mild. What if they're based on 7, 8, 9% or more? Insano numbers by today's standards, but many are predicated exactly on those insane returns 'assumptions'.
.
NoDebt,
Some great comments there, thanks.
DavidC
I was listening to the Mogombo Guru http://mogamboguru.blogspot.com/ on the Dan Coffal show http://www.dancofallshow.com/ and Mogombo said there is no reason for the banksters to steal 401ks, pensions etc because they can simply print the money. That is true. However, if you are an evil NWO bankster that digs hurting people, which path is more likely? I'd say both - print AND steal.
Why in the hell would they sell? Jesus, buy moar!!!
Yeilds go negative, prices climb, and the best part is, once they start, they can never stop...
BUY BUY BUY!!!
someone - YOU - finaaly figured it out. they can never stop - go see Germany in the great bust/collapse of 1920-30. They never learn; but you have it right on.
Waiting for the better offer", of course.
"Whatever it takes", indeed.
You know the system is fucked when banks can't even make money selling their bonds to the muppets.
pretty much/ We've all laughed about the (lack of) risk priced into southern european bonds.
When the coupon rate = 10% you sure can.
Right yellen?
Not to mention that any EU bonds over a couple years old are paying a nice interest rate that you cannot get today. If you cash those in you can get more money - but where do you invest this new found money? In NIRP or ZIRP?
Unintended consequences on steroids.
It will only get worse.
Same with the US social security and pension funds.
Invest in guillotines.
Kicked can, meet brick wall.
It's linked to the regulation
Which regulation? Basel III?
Yes, but it's more than that. They CAN NOT MEET THEIR COMMITMENTS if they sell their current bond holdings and reinvest the proceeds into today's lower-yielding bonds. In other words, the short term gain doesn't cover their long term commitments.
I don't mean to be repetitious
And the desperate cry went out: EUROBONDS! GIVE US EUROBONDS!
...& so it was done...
This is nothing more than funds using Reuters as a negotiating venue with the ECB for much higher bond prices.
If there aren't enough bonds, the ECB could always buy gold.
They can always buy new issuance. All the ECB needs to do is let Greece issue a boatload of bonds at a negative interest rate, and buy them. Problem solved.
ROFLMAO. NIRP this ECB!
This analysis misses one huge thing, roll overs. ie Japan will only issue
370 bill of new issuance plus around 250 bill for interest cost so 600 bill and BOJ is buying 800 so wow net 200 more BOJ buying, but what is missing is
of Japan's 10 trill in debt ave maturity is 7ts and they have 1.1 trill rolling off this year ( so total issuance will be around 1.7 trill against 800 bill . ie so now the holders of that 1 trill that is rolling off that had higher interest payments had to decide if they want to roll over into 0% between 0-4ys or sub 0.4% from 4-10ys. This is the same in US and in Europe. so as pension funds / banks ect are forced to roll I too super low yields they may
1) go bankrupt from holding such low yields against higher obligations,
2) move into corporate other bonds who's issuance uis exploding..
Either way the total issuance is huge this year and I am sure may holders of southern EU bonds are going to look else where when their 3-5% 2y rolls off and they can only get sub 1% for say Italian/Spanish bonds .. Not to mention bonds issued years ago say 5 or 10ys that roll off . japan is same US is same so it's not if they will sell or not.. It's will they reinvest the proceeds of the literally trillions of bonds that will roll off this year into super low yields or look to corporates/ stocks / REITS or anything that's posative .
wont companies take themselves and some shareholders private?
quote from above "central banks will monetize over 100% of government bond issuance this year, "
This is an admission of failure of the EU and it's rules .
So a country joins the EU and loses the power to print money , that country will have to go to the markets to raise money for government operation . This is one of the reason that we have this crisis .
Wouldn't have been better if the EU gave 3 % of the budget of each country to the states as compensations for the loss of money printing ?