Ever since its launch (as well as before [4]) the ECB's QE program has been plagued by suggestions that there may not be enough bonds for Mario Draghi to monetize in order to continue the program until its scheduled conclusion in September of 2016. Or rather, the bonds are there, but due to regulatory, liquidity and purely technical reasons, there is a scarcity of willing sellers at any price (a price which at a minimum yield of -0.20% per CUSIP assures sellers of guaranteed profits).
Which is why many carefully poured over today's monthly update [5]of the ECB's public sector purchase programme (PSPP) aka QE for the month of April, to see if there was a decline in purchases, or if there was anything else worth noting.
On the surface, things were great: after purchasing €47.4 billion in March, the ECB purchased a total of €95.1 billion through April 30, or €47.7 billion in April: a €300 million increase from the previous month.
The breakdown by nation also revealed nothing substantial, with that biggest wildcard of all, Germany, seeing a moderate increase in purchases with Draghi buying €11.1 billion in German bonds, after purchasing a virtually identical amount the month before.
[6]
However, a very different picture emerges when looking at the breakdown by weighted average remaining maturity of ECB bond purchases.
As a reminder, a month ago we learned [7]that the average weighted average maturity in the first month of monetizations as of March 31 was 8.56 years.
What is surprising is that as of April 30, this average maturity dropped substantially, or by 0.31 years, to 8.25, which also suggests that in April alone, the average maturity of purchased bonds must have been some 0.62 years lower, or roughly under 8.00 years.
Further, one look at the chart below shows that nowhere was the scarcity of long-maturity bond (or sellers thereof) more acute than in Spain, which in March had the longest average maturity of all nations at 11.66 and has since tumbled to 9.73. Since the amount of Spanish bonds purchased in March and April was nearly identical, it implies that in April the ECB bought bonds with an average weighted maturity somewhere in the 7.8 year range: a huge drop month over month.
The same, but to a less dramatic extent, is apparent with the ECB's purchases of Italian, French and, yes, German debt as well, all of which had a notably lower average weighted maturity.
[8]
In other words, while the ECB is representing that it has no limitations on total monthly volume purchases, it is suddenly finding itself forced to buy increasingly more bonds on the short-end.
Which brings up the question: is this due to the specific shift in the purchasing strategy of the ECB, or has the ECB simply run out of bond sellers on the long end and as a result is forced to buy ever shorter-maturity paper?
If the answer is the latter, it confirms that the ECB will indeed have a very difficult time of completing its QE until its stated maturity (forget about it being open-ended in 2017 and beyond), because quite simply unless the ECB lowers its yield threshold of purchases, which in turn would mean lowering the discount rate one more from -0.20% to -0.50% or even less, then it will very soon have no bonds which to monetize on the short-end either.
And once the market realizes that the ECB is indeed facing a massive shortage of not only collateral but willing sellers, then the recent selloff in Bunds will be a pleasant distant memory as German paper trades promptly right back at its record tight yields of 0.05% and into negative territory promptly thereafter.
