Amid the ever-expanding easing program in Europe (longer? more-er? different-er?), one of the largest concerns was that between the central banks domination of the markets, and the subsequent crushing of liquidity, finding willing sellers (at any price) to meet the needs of central bank asset purchasers could be a problem [12]. However, as The FT reports, [13] it appears the Chinese stepped up to the plate to 'help' The ECB (rather The Bundesbank) out from it dilemma. Just as we saw with Chinese selling US Treasuries (whether to diversify away from the major reserve currencies, deal with outflows, or to manage a liquidity crisis at home), The PBoC's reserve management wing, the State Administration of Foreign Exchange, has been selling some of its German government bonds since the ECB began buying them in March, say two sources close to central banks in China and Europe. This news has prompted further weakness in Bunds, despite expectations of Draghi unleashing more buying in December.
We previously asked "who will sell to The ECB?" in a detailed discussion [12] of the scarcity of collateral constraints and lack of supply to meet quantitative easing requirements And here, rather ominously, is JPMorgan's conclusion - phrased as politely as possible - why the ECB will fail in its QE endeavor, something we have been warning about for the past three years:
"In all, we note the above analysis challenges the ability of the Eurosystem to meet its quantitative target without distorting market liquidity and price discovery."
Well it appears The ECB has found a willing 'external' seller. As The FT reports [13],
Concerns over the whether the Bundesbank, Germany’s central bank, could find enough German bonds to buy have long surrounded the €1.1tn programme. The Bundesbank must purchase around €10bn of bonds a month as part of QE — a potentially problematic amount due to low levels of debt issuance by the German state, although ECB officials have repeatedly downplayed these concerns.
The Bundesbank has scoured the world for likely sellers, according to one person familiar with the matter, including Safe. Under pressure to make a return on its reserves portfolio, Safe has agreed to take advantage of the high prices on offer for the low-yielding German bonds.
“Chinese sales of German Bunds would certainly facilitate the ECB’s quantitative easing operations, so this is an instance where the interests of the ECB and PBoC are congruent,” said Eswar Prasad, an economist at Cornell University and former head of the China division at the International Monetary Fund.
Sales by Safe, thought to hold hundreds of billions of euros-worth of European government debt, would also help the ECB should an emerging market slowdown threaten the single-currency area’s recovery and force a more aggressive package of monetary easing.
...
Safe does not deal directly with eurozone central banks, which purchase bonds from investors via banks’ bond trading desks. But its sales of bonds are making life easier in the dealing rooms of Europe’s monetary powers, where traders have been handed the difficult task of finding €60bn of mostly government debt to buy each month as part of the QE package.
In response to this report from The FT, [13]The ECB stated - somewhat obviously now that we know there is a large willing seller:
“We provide weekly updates of bond purchase volumes but do not comment on individual transactions. We have not yet seen any scarcity of bonds to buy.”
The Bundesbank declined to comment.
Of course, while confident in the ability of Draghi et al. to soak up whatever China selling may remain, at the margin, knowledge of China's willingness to bulk dump its Bunds appears to be weighing on Germany's bond markets more than the banker would like...
[14]
Finally, we note the following two headlines from Bloomberg, which just about perfectly explain how no one knows what it going on in today's centrally-planned markets:
- First... German Bund drops as Draghi cools QE talk.
- And then... German Dax rises as Draghi hints at more QE.
