ECB Discloses Purchases Made Under Its Emergency QE Program

Yesterday, for the first time, the ECB published its first bi-monthly breakdown of its holdings under the Pandemic Emergency Purchase Programme (PEPP) with information on the split by asset class as well as by country and average maturity for sovereign holdings along with similar details on the Asset Purchase Programme (APP) for May. With PEPP having become operational on 26 March 2020, Tuesday's release also comprises four days of March purchases on top of April and May according to Goldman.

And while it was already clear that the ECB deviated from capital keys in its PSPP programme both in March and April, DB's Jim Reid notes that this was not seen as clearly in the PEPP data though which is strange as the latter was set up to do this with the former not.

Specifically, the PEPP data shows allocations much closer to the ECB capital keys, with Italy benefiting the most from positive deviations from capital keys but only by +4.7% compared to roughly +20% in the PSPP in March and April. On the other hand, Germany's share in PEPP was roughly in line with its capital key versus more than a -20% negative deviation in PSPP in March and April.

Total purchases under the emergency plan amounted to €234.7 billion at the end of May. Sovereign bonds comprised around 80% of PEPP purchases, broadly in line with the APP, with commercial paper being the largest private sector component. The ECB also spent €35.4 billion on commercial paper, and acquired more than 80% of that debt on the primary market. 

Despite the ECB's guidance on flexibility regarding the country allocation of sovereign purchases under PEPP, purchases were less skewed towards Italian and Spanish bonds than anticipated, particularly when compared to the Public Sector Purchase Programme (PSPP) as shown in the chart top, right. Italian bond purchases, for instance, ran close to 5% above Italy's capital key share under both sovereign purchase programmes. Capital key deviations for France across both programmes largely offset each other, suggesting some substitutability between the allocation of purchases across PEPP and PSPP. Looking at PEPP and PSPP jointly, sovereign purchases were still skewed away from core jurisdictions in favor of peripheral bond markets broadly in line with expectations.

As Bloomberg notes, the numbers shine a light on how much more flexible the ECB’s €750 billion crisis program is in comparison to its regular quantitative-easing plan. The latter, which was recently questioned by Germany’s constitutional court, is constrained by limits on how much of each nation’s debt the central bank can hold, and a rule that requires purchases to be allocated proportionately across the region.

Drilling down further into the data, the ECB bought €37.4 billion of Italian debt since the plan started in late March. That means it bought a greater share of the country’s bonds than its capital key - based on the size of Italy’s economy and population - would have implied. The ECB also bought €4.7 billion of Greek debt so far, after it decided to include the country’s sovereign bonds in its emergency-purchase program despite the fact that Greece still carries non-investment grade. The move eased investors’ fears, with yields on 10-year notes dropping from around 4% before the announcement of the scheme to around 1.5% on Tuesday.

While PEPP purchases were conducted in a largely market-neutral fashion across the yield curve in most jurisdictions, Germany, the Netherlands and Belgium saw a concentration on shorter maturities, likely including bills, above and beyond relative supply. Near-term redemptions of PEPP holdings will therefore mainly affect bond supply in these countries unless they are offset by reinvestments. The ECB is expected to announce reinvestments of PEPP holdings for the duration of net purchases at the upcoming Governing Council meeting this week.

The weighted average maturity of the ECB’s public-sector pandemic portfolio stood at 6.3 years, compared with 7.2 years for QE holdings.

While capital key deviations under PEPP surprised to the downside, combined purchases under PEPP and PSPP show a skew away from core markets towards the periphery broadly in line with most analysts' expectations. That said, the release signals limited appetite for large, persistent capital key deviations for the time being.

Bank of France Governor Francois Villeroy de Galhau has said the ECB should go even further and remove the capital key from the program - not just temporarily but altogether - because it’s an “uncalled-for constraint.”

That said, although the bi-monthy cumulation of PEPP holdings may mask larger temporary capital key deviations, Goldman notes that the release signals that the ECB may be seeking to limit the persistence of such deviations.

Italian bond yields had risen sharply amid doubts about how the government would pay for battling the recession caused by the virus. They’ve fallen significantly since the ECB launched its purchases and European Union politicians moved closer to a joint fiscal response that may distribute some of the costs across the 27-nation bloc.

European policymakers have repeatedly said they’re ready to increase the size of the pandemic program and extend if it needed. Indeed, many expect the ECB to announce an expansion in their stimulus programs tomorrow, with many Wall Street economists expecting that the ECB will be announcing a doubling of the PEPP to €1.5tn and extend the minimum net asset purchase period until mid-2021, even though as a report from MNI on Tuesday suggested some on the committee are not ready to do this so there is room for disappointment.