Back in April of 2015 in a post titled "Mario Draghi, Collateral Scarcity, And Why The ECB Will Soon Buy Corporate Bonds", we explained not only why, one year before it was unveiled, the ECB would buy corporate bonds, but why in Europes highly supply constrained bond market, Mario Draghi would not only have to expand his central bank's collateral pool as it runs out of eligible bonds whose yields are below the ECB's deposit floor thus making them ineligible for ECB purchases, but may have to do even more QE in a vicious loop as frontrunning the ECB leads to ever lower yields, and thus even more deflation.
Well, in March the ECB indeed announced the monetization of corporate bonds, and moments ago, in a shocking admission, Mario Draghi admitted precisely what we had warned about:
- ECB SAID TO WEIGH LOOSER QE RULES AS BREXIT DEPLETES ASSET POOL
- ECB OPTIONS SAID TO INCLUDE MOVING AWAY FROM QE CAPITAL KEY
- ECB SAID TO BE CONCERNED ABOUT SHRINKING POOL OF ELIGIBLE DEBT
The Euro is, predicably, plunging on this indirectly promise of even more easing.
What does this mean? Well, for one thing it's as close as the ECB will go to admitting policy failure under the current version of QE.
It also means that the ECB will have to further cut its -0.4% deposit rate going even deeper into NIRP, or do away with it entirely as a gating factor for future QE purchases. The reason for this is that as of this moment, more than half the German government bonds on the European Central Bank's shopping list are ineligible for its asset-purchase programme because they yield less than the deposit rate, research from Swiss wealth manager Pictet shows.
Pictet said on Monday that a record 57 percent of the German bonds in the ECB's chosen two-to-30-year maturity range are now yielding less that the -0.4 percent deposit rate, the cut-off for purchases. That total has risen from 45 percent in February and 50 percent almost two weeks ago. If the ECB does not relax its own restrictions on purchases it risks running out of bonds it can buy issued by some countries, including Germany -- Europe's biggest economy and the euro zone's lowest-risk borrower.
And as yields slide ever lower, the universe of eligible bonds shrinks with every passing day.
As a result, the ECB now has no choice but to react. And when it does so, it will force even more frontrunning of Bunds and all other European bonds, pushing yields to even recorded lows, forcing the ECB to react again, until ultimately there are no willing sellers anywhere at any price.
But for now, in yet another desperate attempt to prop up risk assets, the ECB will proceed with what we said it would over a year ago, as a last ditch attempt to kick the can. We give this 4-6 months before helicopter money is unveiled.
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Finally, it appears even this last best hope is not having a lasting effect...