The ECB’s move to restrict PSPP purchases to sovereign bonds with yields at or above the deposit facility rate has far reaching implications for the German bund curve, Citi notes. Specifically, Citi says bunds will be bought until yields converge on -0.20bps.
The -20bp rule means that the Bundesbank and other core NCBs will be buying higher duration paper than other markets such as Italy.
It also means that the Buba will have to buy very close to the 25% issue limit in all remaining paper, assuming no change in market value.
The ECB may then have to drop the 25% limit for some issuers and perhaps all – which in practice means that NCBs can buy more of Non-CAC bonds.
In other words, by virtue of the fact that a larger percentage of periphery bonds trade with a yield above the -0.20bps threshold (compared to Germany), Bundesbank purchases will skew towards longer-dated paper by comparison. Additionally, the yield floor may make it difficult for Germany to hit asset purchase targets while remaining under the 25% issue cap.
The key takeaway however, is this:
We think that the buying restriction means that large parts of the German curve converge towards -20bp.
To be clear – we are indeed saying that -20bp is a yield target now that will gradually extend along the curve. Both the Bundesbank and private investors are expected to motivate a more concentrated buying squeeze.
* * *
In sum, yields on shorter-dated German paper will move up to the deposit facility threshold and with the 10-year yield sitting below 40bps, it won’t be long before the entire curve flattens at -0.20bps.