Yields on European sovereign debt have collapsed in recent months as investors piled into these 'riskless' investments following hints that the ECB will unleash QE (at some point "we promise") and the economic situation collapses. However, Mario Draghi has made it clear that any QE would be privately-focused (because policy transmission channels were clogged) and the appointment of Blackrock to run an ABS-purchase plan confirms that those buying bonds to front-run the ECB may have done so in error. As Rabobank's Elwin de Groot notes in six simple comments that he expects continued "procrastination" by the ECB over sovereign QE even after dismal economic data - and in doing so, exposes the entire facade behind The Fed's QE.
Six reasons why the ECB will delay Sovereign QE as long as possible (via Bloomberg)
1) Legal constraints, or risk that ECB will be challenged in court for tinkering with “debt monetization”
2) ECB and national central banks would expose balance sheets to heightened credit and duration risk
3) QE may not deliver sufficient “bang for the buck” as bund yields are already low
4) Unclear whether program would have much impact on real economy
5) QE disturbs efficient allocation of resources
6) Risk of creating bubbles in asset prices
Perhaps it is time for the Fed to read those last 3!!
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So buying sovereign bonds in the view that the ECB will be the big bid for you to sell to in the future at any price you like appears to be "wrong" and with the massive positioning apparent in the market this could be a problem. In fact - if one were to try to trade an ABS-QE, it is the ABS risk premium compression alone that should be traded... (as we noted here, real borrowing costs remain extreme)
These are "market" rates... i.e. what real risk is being priced at away from the hand of Draghi...
And so - smart money will be selling government bonds and buying any and every ABS-backed asset they can find in an effort to monetize the ECB's risk compression. The question is - who wil be the first seller?