Back in December [8], when the total amount of annual ECB Q€ was still up in the air and and consensus expected a lowly €500 billion annual monetization number, we calculated that based on Germany's capital key contribution of about 26%, the ECB would monetize some €130 billion of German gross Bund issuance, or about 90% of the total scheduled issuance for 2015. Subsequently, the ECB announced that the actual amount across all ECB asset purchasing programs, will be some 44% higher, or €720 billion per year (€60 billion per month).
So what does that mean for the revised bond supply and demand across two of the most important developed markets?
Well, we already know that the Bank of Japan will monetize 100% or just over of all Japanese gross sovereign bond issuance (source [9]).
As for Germany, on a run-rate basis, and assuming allocation based on the abovementioned capital key, it means that for the next 12 month period, assuming no major funding changes in Germany, the ECB will swallow more than a whopping 140% of gross German issuance!
Or, said otherwise, the entities who will buy more than all gross German and Japanese issuance for the next 12 months, are the ECB and the Bank of Japan, respectively.
[10]
This also means that to fulfill its monthly purchase mandate, the ECB will have to push the price to truly unprecedented levels (such as the -0.20% yield across the curve discussed previously, or even lower) to find willing sellers.
That said, please don't tell your average Hinz and Kunz that more than all German bond issuance in 2015 will be monetized. It will bring back some very unpleasant memories.
[11]
