Why European Bondholders Refuse To Sell To The ECB

Just weeks before Mario Draghi's "whatever it takes" trillion-euro Q€ bond-buying-fest is set to come true, The ECB faces a problem they likely never expected - unwilling sellers. On the heels of our analysis showing central banks will monetize over 100% of government bond issuance this year, Reuters reports that mere weeks before the ECB begins their program, banks, pension funds and insurers across the continent are hoarding them for regulatory or accounting reasons. "We prefer to hold on to them," said Antoine Lissowski, deputy CEO at French insurer CNP Assurances. "The ECB's policy ... is reaching its limits now."


Yet another unintended consequence of massive monetary manipulation... monetizing >100% of issuance in 2015; the net issuance of government debt in 2015, which will not only be the lowest in history, but - for the first time ever - be negative, explains all one needs to know.


Has, as Reuters reports, left European asset managers forced to hold what they have (and unwilling to sell to the ECB)...

At the height of the euro zone debt crisis in 2012, ECB President Mario Draghi's problem was how to convince investors to hold on to European bonds. Now he faces a struggle to make them sell.




That may complicate implementation of the quantitative easing program, aimed at reviving growth and inflation in the euro zone. The ECB might have to pay way above market prices, or take additional measures to encourage investors to sell.


"We prefer to hold on to them," said Antoine Lissowski, deputy CEO at French insurer CNP Assurances. "The ECB's policy ... is reaching its limits now."


Banks, which buy mainly short-term bonds, use government debt as a liquidity buffer. Selling would force them to invest in other assets, for which -- unlike government bonds -- regulators ask banks to set cash aside as a precaution. Alternatively, they can deposit money with the ECB, at a discouraging interest rate of minus 0.20 percent.


Insurers and pension funds typically buy long-term debt. They could make hefty profits selling to the ECB. But the money would have to be re-invested in other bonds whose yields would be much lower than their long-term commitments to clients -- a regulatory no-no.




"If we were to sell bonds, we would make huge capital gains, but we will then have to reinvest that money at a yield of 0.5 percent, set against liabilities at 3.50-3.75 (percent)," said Bart de Smet, the CEO of Belgian insurer Ageas.


Dutch banks ING and Rabobank, Spain's Bankinter and rescued lender Bankia and France's BNP Paribas said they were unlikely to sell when the ECB comes knocking.


"The volume of sovereign bonds we own at the moment is not linked to monetary policy," BNP Paribas deputy CEO Philippe Bordenave said. "It's linked to the regulation."




But everything has a price. RBS strategists see a 40 percent chance that ECB purchases would help turn German 10-year Bund yields negative this year.


"There's a lack of bonds to meet current demand globally, so it's going to be difficult to see a lot of sellers," said Patrick O'Donnell, portfolio manager at Aberdeen Asset Management, who does not plan to sell.


"The risk is that if the ECB is serious about buying at the rate of 60 billion a month, the price impact could be quite material."

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Perhaps most ironically, if Greece were to leave the euro, selling pressure might increase, which would thus enable The ECB to print moar, monetize moar, and buy moar bonds...