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Goldman Asks, Is The Bundesbank "Ominously" Trying To Sabotage The ECB's QE?
When the sell-off in German Bunds first got going, it looked like a temporary squeeze, with the largest position in the market – the ECB QE trade – coming under pressure after much weaker-than-expected Q1 GDP on 4/29.
However, as (Draghi mouthpiece) Goldman notes, there is something more than supply dynamics or ECB communications going on, as the Bundesbank (Buba) buying has fallen short of its purchases (in average maturity terms) from the very beginning. Goldman warns, ominously, this kind of signal – from the key hawk in the Eurosystem – has the potential to undercut the credibility of ECB QE, since it weakens the portfolio balance channel.
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Goldman previously argued that the weak activity reading rattled a market that had been operating on a core thesis of strong US growth. The resulting uncertainty caused Bund yields and EUR/$ to rise, with the DAX also selling off on the day. Since then, something more ominous has come into play...
One clue has been the communications ping pong from the ECB. On May 18, Executive Board member Coeure said “the rapidity of the reversal in Bund yields is worrisome,” citing it as another example of “extreme volatility in global capital markets.”
ECB President Draghi sent the opposite message on Jun. 3, saying “one lesson is that we should get used to periods of higher volatility,” followed on Jun. 10 by Executive Board member Coeure stating that “the ECB does not intend to counter [Bund] volatility in the short term."
Goldman took a dim view of all this in our last FX Views, even if a charitable interpretation is that President Draghi basically sent a dovish message on Jun.10 and simply didn’t want to signal "activism" in the face of short-term volatility.
After all, one goal of ECB QE ought to be to make Europe’s safe haven asset (Bunds) expensive, so that investors get pushed into risky assets like equities and the Euro periphery.
If there is ambivalence, it sends a harmful message to markets that, after all, are still new to ECB QE. This might be one reason why EUR/$ has held up, even as US data (payrolls, retail sales) have picked up.
There is something more than supply dynamics or ECB communications going on, something that has the potential to undercut the credibility of ECB QE.
As Goldman explains below, the Bundesbank has reduced the weighted-average maturity of its Bund purchases from 8.1 years in March to 5.7 in May, in contrast to the Eurosystem as a whole where this number has stayed around 8.0 years.
It's not like the Bundesbank is not spending its money (as we noted previously, in fact May - just as ECB telegraphed to its most valuable clients - saw purchases soar)..
but it is what it is spending it on, not how much that matters...
The ECB publishes monthly data for the outstanding stock of bonds bought under its QE program, together with a weighted average for the corresponding number of years to maturity. We use these data to calculate the average maturity of monthly buying by the Eurosystem (Exhibit 3).
This shows that the average maturity of ECB bond buying is around 8.0 years, in line with what Executive Board member Coeure said in his May 18 speech. However, while Italy and Spain see purchases that have an average maturity above that of the outstanding debt stock, Bundesbank buying has fallen short from the very beginning.
There are obviously many explanations for what is going on (see below).
But this kind of signal – from the key hawk in the Eurosystem – has the potential to undercut the credibility of ECB QE, since it weakens the portfolio balance channel.
After all, it was supposed to be low yields in core Europe into risk assets. If those yields now rise and become more volatile, such portfolio effects will be lessened.
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What Goldman is implicitly suggesting is:
Buba is intentionally focusing on shorter-dated maturities, unwilling to throw away its cash on the high prices that bond holders will demand for high cash coupon debt (when in fact the central bank should be price agnostic if it had truly "got ECB religion")
So is Buba really sabotaging Draghi?
Or is this a warning to Weidmann to stop being stingy with the bond buying?
Remember also, Goldman needs low-ish bond yields and low-ish volatility for its QE-driven weak EUR trade to pay off...
It remains our view that fundamentals will ultimately take EUR/$ lower in line with our forecast. That said, we see recent Bund volatility and what it means for the credibility of ECB QE as the first material challenge to our view.
So there's ulterior motives for this 'warning' whereever we look.
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Perhaps it is also the timing of such a note that implies a louder warning... with Grexit around the corner, those "expensive" long-dated Bunds are going to be even more pricey when Buba needs to step in and buy to prove contagion is not there.
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Who cares?
Bring on the collapse already...
The question is, who is getting the interest payments from the ECB QE? Maybe Weidmann wants to limit damage for Germany, by minimizing outflows and maximizing inflows? But if such interest payment go via Target2 too, when what is it about?
PS Italy and France have a lot of gold to pay off Target2 debt to Germany ???
From accumulated available evidence, it is unwise to believe any public statement from the Vampire Squid.
There is no conspiracy here. Until end of April most German bonds were trading at yields below the repo rate of -0.2% and were therefore not eligible for bond purchases. With the rise in yields more bonds with shorter maturities have become eligible for QE, so Buba has been diversifying its holdings into shorter maturities.
U S data, (payroll, retail sales) have picked up? who writes this shit?
The problem is…
Those who actually KNOW what’s what (the REAL power & influence) are keeping their mouths shut and the ones who are:
are filling the vacuum !
"U S data, (payroll, retail sales) have picked up?"
I was just about to post exactly the same comment then noticed your post. And the answer is, of course, Goldman so it is just the usual Fed propoganda. Truly pathetic isn't it?
Thought the same here...
An alternative for why the EUR /US$ is holding up is that people might be waking up to the fact that the emperor (US) really has no clothes. Another quarter of weak data and no fed rate hikes will make shit interesting.
really, betting on the robust recovery in the usa..they're reaching for order in their chaos
BUba trying to sabotage Draghi´s money printing? I hope so.
If Wiedmann ever decides the EUR is a bad idea, the damage he could inflict on the monetary union quietly & by stealth would devastating. Perhaps this is one such attempt. Drive down short maturity Bunds into the hole so the longer-term Bunds are still "fairly" priced for individuals seeking capital protection, and enabling BuBa to purchase them en masse -- should they really need to.
But, but, but...according to Ghordius it is Zee Rosbif's who are trying to sabotage the EU project not Zee Germans. I thought Zee Germans (And Zee Frogs, although someone forgot to tell Marine Le Pen) ARE the EU project? Not that I would believe a single word spoken by Goldman. You can be sure that their Prop desk, Oops sorry I meant their Non-directional position trades hedging client positions desk, is on the other side of anything they say publicly.
It is significant that in these ECB statistics GREECE is missing,
whilst they must have Greece holdings more than e.g. Malta.
GS is the great Satan
methinks the squid is on the wrong side of the trade
You have to BTFD Bitcoin $254
MSP is A set of cyclic algorithms and MSP data is currently showing a potentially serious problem here for the markets on a cyclical/structural level for the next few months – statistically bias is down for the next 2.5 to 3 months from MSP.
Moreover, daily market structure projection work is pointing to a serious risk here…I am not posting here to promote any blog or person but because i think – this is an extreme inflection point it seems.
Here is some detail on MSP for today. Today seems like it could be pivotal and ironically it looks like most everyone is looking up …but almost none of the statistical probabilities shown in these charts are resolving higher:
http://mcm-ct.com/blog/fed-day-targeted-intraday-msp-probability-analysis/
http://mcm-ct.com/blog/fed-day-intraday-probabilities/
This is more on the longer term MSP:
http://mcm-ct.com/blog/daily-weekly-market-structure-projection-update-p...
some other rare events:
http://mcm-ct.com/blog/the-big-picture-on-mcm-hindenburg-omen-do-not-tak...
Fundmentals bitches! https://finviz.com/futures_charts.ashx?t=CL&p=m5
M'lud methinks Goldman doth protest too much.
If TBTF Goldman goes under and they should have ( Bernanke bailed them and other EU banks out ) half the EU sinks and the rest soon after.
Therefore the EU's fate is directly linked to an Investment Bank. If we include the influence of JP Morgan and Deutsche Bank then the EU's swimming in quicksand.
Handing it's Sovereignty to Goldman, who are so heavily invested, the house of cards collapses.
The little children don't die and Mario Faghi & Mark Carney still WORK FOR GOLDMAN. Infact, why not save costs and have The ECB and BOE inside Goldman's Central Office , under one roof.
"Bernanke bailed them and other EU banks out"
Actually Ben was/is nothing but a yes man. The person that bailed them out was none other than Hank "Mother fucking" Paulson. He's the first one that should hang from the gallows in the town square.
Now you'd think Bundy would be rolling in doh, they got 72 Trillion on the Books in Gambling Bets
But that's Ok, they have 2 Billion in Capital to cover it.