Less than 48 hours after the official launch of the ECB’s celebrated PSPP Q€ initiative (or what we might call ‘Draghi’s descent into delirium’), we examined [4] the program’s structure and noted that full implementation might prove challenging. Citi had already posited a scenario whereby the central bank may be forced to raise the issue cap on non-CAC bonds in the event sourcing enough purchasable assets in core countries proved difficult. Here’s what we said at the time:
Only two days into PSPP 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).
As time went on and the Bund curve converged on -0.20% [5], it was becoming readily apparent that the depo rate floor effectively made the program self-defeating because if the goal is to drive down rates but there’s a floor under which you will not buy, then the more successful you are, the fewer options you have in terms of meeting the program’s monthly purchase totals.
Of course Bunds sold-off dramatically starting on April 21, with yields on German 10s jumping from under 10bps to over 70bps prompting every sell-sider and pundit to speculate on the cause [6] of the ‘great Bund rout’. We’ve covered various explanations at length (here, here, and here for instance), so we’ll leave that aside for now other than to say that one possible contributing factor that we discussed [7] late last month was the fact that EGB supply is set to be positive in May before reversing course into the summer “drought” when supply will turn negative, deeply so in July.
Fast forward to 6 pm London time on Monday and the ECB's Benoit Coeure told a non-public audience of hedge funds that the because markets are usually less liquid in the July-August “lull”, the central bank would be “slightly” front-loading PSPP purchases in May and June. That very material and very non-public information became available to the rest of the market some time later and we imagine that some folks made some money in the ensuing 150 pip EURUSD plunge [8].
Looking past the ethical implications of this for time being, it’s worth pointing out that, as BNY Mellon strategist Simon Derrick told WSJ [9], “even though this is just front-loading, it is effectively an increase in the size of quantitative easing, even if just for a short period of time.”
That's the "MOAR" message.
Of course this means the opposite is true as well. That is, anytime supply is net negative, the ECB will taper QE. Ultimately, the central bank has just announced its intention to conduct intra-QE tapering and un-tapering in an effort to manage flow volatility.
With that in mind, we'll leave you with the following chart which should serve as a helpful guide as you traverse the ECB's now dynamic PSPP:
[10]
