As we noted last week [5], Mario Draghi’s move to purchase €1.1 trillion in EGBs at 124% of par may have mitigated market jitters regarding the ECB’s ability to source enough bonds to meet PSPP monthly asset purchase targets, but it also virtually guarantees that the central bank (and perhaps some eurozone NCBs) will be forced to operate from a negative equity position should sovereign spreads blow out.
We also pointed out that due to the ECB’s explicit willingness to buy bonds with negative yields, the usual “we’ll hold them to maturity” excuse won’t work when it comes to explaining away accounting insolvency. Fortunately, the central bank’s governing council has a plan to deal with the increasing amount of EMU bonds trading with negative yields: “Try to avoid them.”
Via Bloomberg:
- ECB said to lack QE Accord on losses from negative-yield bonds
- ECB Governing Council hasn’t agreed on how to treat losses incurred on bonds with negative yields, according to three euro-zone central bank officials.
- National central banks might try to avoid buying such securities for now, one of the people says
This of course begs the following question: what happens when PSPP purchases drive yields on all EMU debt into negative territory?
[6]
[7]
Charts: Citi, WSJ
