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"Taper Tantrum" Talk Starts In Europe Two Days Into Q€
The ECB’s PSPP got off to a rather inauspicious start on Monday when the central bank admitted that the governing council “hasn’t agreed on how to treat losses” on bonds with negative yields. Clearly this is a problem given that: 1) quite a bit of core, shorter-dated paper already trades in negative territory, and 2) the purchases themselves will drive down yields across the board in what will quickly become a self-fulfilling prophecy. The only hint given as to how the ECB and NCBs intend to tackle the issue was this: “National central banks might try to avoid buying such securities for now.”
Then we learned that DOMO trades were going through in increments of between €15 and €50 million suggesting that a general lack of supply and/or liquidity may well stymy the entire enterprise. On that point, we said the following:
Needless to say, if the ECB is unable to meet its monthly asset purchase targets (which, at €15-50 million dribs and drabs, looks likely), expect chaos, as the market has spent the last several months front running PSPP and would be absolutely horrified if DOMO (Draghi-open-market-operations) has to be downsized.
On day two of PSPP the news continued to reinforce both the idea that “avoiding” negative-yielding assets will be quite difficult given the program’s scope and, relatedly, sourcing enough bonds to meet monthly targets is going to prove exceptionally difficult in some markets.
As for trying to avoid negative-yielding assets, it appears as though that effort lasted all of 24 hours. Here’s Bloomberg:
- Central banks said to buy German notes that have negative yields
- Central banks purchased 5Y securities, said three people with knowledge of the trades, who asked not to be identified because the transactions are confidential
In terms of sourcing enough purchasable bonds, Citi notes that if, in a pinch, the ECB expanded the issue cap all the way up to 50% (from 25%) in non-CAC bonds (NCBs can’t do this with paper that contains CAC clauses without obtaining a blocking minority), the central bank could add an additional €500 billion to the program:
However, Citi goes on to say that even with that option and even if the ECB adds other agencies to the list of eligible debt, core countries may still fall short of their targets resulting in “effective tapering”:
The third, and final concern on QE execution is that despite the agency and non-CAC bond options, some core NCBs may not be able to fulfill their QE quota. In that instance, we see the following evolution of events:
The core NCB quota is moved to the semi-core/periphery to prevent the effective tapering of QE. This is made more practical buy the localization of risks.
If that proves too controversial, perhaps with an eye on the German constitutional Court, then the ECB could move to cutting the depo rate further to maintain loose financial conditions and especially to prevent a taper tantram forcing EURUSD higher.
There are several interesting things to note there. First, only two days into DOMO and there’s already talk of a taper tantrum triggered by the core’s inability to source enough bonds to meet quotas (everyone saw this coming of course, including us). Second, as we noted last week, it does indeed look as though the ECB will have to cut rates further into negative territory — recall that JPMorgan thinks we’re headed all the way down to minus 3%.
The punchline to the whole thing is this: even though PSPP is so large that it literally cannot be implemented fully given supply constraints, in the new paranormal where QE programs are measured in terms of how large they are relative to a country’s GDP, the ECB’s effort here is just not enough to appease the market. From Citi:
...the size of the programme is small in terms of what is needed to achieve the stated objective of increasing medium-term inflation of “below but close to 2%”, especially when compared to the size of QE in other markets.
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"No Plan B."
Like all political plans, Plan N.
Dear ECB, just BUY STOCKS to offset the losses on negative yield bonds.
Just BTFD!
Bullish for us stocks
now now, instead of thanking Citi, wait 3/4 weeks for this to get digested by the geniuses and short the DAX;-)
As someone here said afew years back -
Central Banks are masters at backing themselves into a corner.
Of course the 'corner' was created by them as well.
So THAT'S the ominous 11.3 warning that THE ECONOMIST was referring to! ~ lol
Worse magazine ever.
nice that Citi joined the megabank chorus of "this Q€, is not enough"
This is rubbish if they move the overnight rate back to 0% like BOJ/FED/BOE then banks can sell their bonds and leave the proceeds with the ECB.. ie its the fact the overnight is -0.2% that is creating the negative rates.. ie if the raise overnight to 0.1% like the BOJ ECB bond holders would sell huge amount at zero and park the funds with the ECB at 0.1%. Saying they need to make rates even more negative means their just playing games, ie US/Japan/EU cant pay debts and this part of the central bank scheme to create non market rates (we have to do it sure)... such rubbish..
If there aren't enough bonds to buy, they could always buy gold.
We can sell them more than enough sub-prime auto and student loans to suck up that trillion in freshly minted notes. Junk for junk.
there is enough bonds, there a penalty rate after they have been sold which makes reinvesmtent messy...ie if the overnight is 0.1 and the 2 year rate is -0.25% then most holders will sell down to 0% and collect the 0.1% its the fact the overnight is -0.2% so banks dont want to sell bonds that have posative cpns (even if the price has risen to negative level) when the proceeds will be held at -0.2%... ie if they raised the overnight to 0.5% people would sell even more and they know this..its German shame...to make it not work
lololol where's China on that last graph
Its great how these Central bankers get an idea and dont even think of the possibilities of how it is going to work......QE was the CB buzzword..and they just followed the others...actions have reactions....they have no idea what they will be....
I disagree. I think they know exactly what the probable outcome is, and that is the engineered effect they are pursuing. What they dont know is how to spin this in any sort of language that wont get them pushed up against a wall and shot by the masses.
QE....it only encourages more recklessness and financialization of the economy, why take the risk to lend to businesses when you can borrow at 0% and make a few quick (and almost guaranteed) bucks in financial assets because everybody is doing the same thing?
Why is inflation increased so slowly under QE? Do they even know how the CPI is measured? They obviously believe in "trickle down" economics to boost CPI.
Fuckin hell. If they wanted to boost inflation, couldn't they just have bought student debts, mortgages and other debts in exchange for cash credits to the checking accounts of low to middle income earners instead? People will spend that money if the Fed has their debts covered. Banks would probably begin lending to businesses as well.
"general lack of supply and/or liquidity may well stymy the entire enterprise"
Impulse Power sucks...where's Scotty or Spock ?
Should be able to stretch this canard out for many months going forward.
I'm willing to help. Just slap a $60,000 lien on my house at -2%. I'm sure BofA won't object (it takes them two months just to answer an email these days). I know it's just $100 a month to me, but a once-a-month, bankster-sponsored hooker-and-blow party ($80 hooker, $20 blow) works for me.
On a serious note, does anyone know any PM dealers who take American Express and/or Discover? Boatloads of credit that need to find more reliable currency.
why the focus on bonds if what they really want to do is move the equity markets? Copy Japan and buy stocks directly.
Can someone please tell me the insane reasoning of how negative yields helps ANYONE? Is it ONLY to benifit large banks and the ruling class? And if so, why is this not Topic #1 on every political talk show in the world!? (Oh, that's right, Putin/China/Ukraine/War Is Peace, I forgot.)
Something along the lines of "we'll totally distort the bond market so the rest of you can't touch this, so go elsewhere and distort these other markets and make yourselves rich".
Oh and did I mention the eventual trickle down of "wealth" that's supposed to happen?
PhDs, I'm glad we have them.
What are you going to do now College boy's.
Look its really simple.
Imagine wanting to run the banking system of a continent. Or a very powerful say 300 m plus country
Well all you need to do is go search the jungles of Kenya for particular type of monkey, preferably a faggot, given to munching white cock, make sure it is mentally deranged, promiscuous and cant think for itself apart from its incessant need to preen and find its next white banana.
Otherwise look for the spawn of Satan and preferably the demented offspring of the third Reich with criminal corrupt backgrounds, sociopathic, preferably also vindictive maniacal and with an unhealthy interest in obscure ritualistic sexual deviancy, educated and from the sewers of corruption like GS, and there you have it.
The monkeys are harder to find, at least ones that are sexually depraved they cannot tell the difference between whats pussy or not.. And searching anything in the jungles of Kenya is something no sane man should ever do
Oh yes, this is precisely the result you would expect to get. Not close, not approximately, but exact with a precision unmatched in science. Or Economics