Yesterday we pointed out the many "Conundrums Of A Policy Maker" which focused on the waning ability of central banks and sovereign governments to continue to control asset prices as their traditional forms of stimulus are reaching the end of their useful life. As proof of just how ineffective the marginal stimulus from Central Banks has become, the Financial Times points out this morning that the ECB will likely have bought every dollar of eligible debt available by the end of this year under its $1.6 trillion QE program.
As the FT points out, there is about $7.5 trillion of government and agency paper outstanding in the EU. That said, the ECB is restricted to purchasing bonds with maturities ranging from 2-30 years and with a yield above the eurozone's deposit rate of -0.4%. According to FT calculations, those restrictions eliminate roughly $1.5 trillion of eligible paper. Moreover, the ECB is also restricted from purchasing more than 33% of any given issuance or of a single country's outstanding debt which reduces total supply of eligible paper further to just $2.0 trillion which is only slightly more than the $1.6 trillion approved for the QE program.
That said, other rules require the ECB to make purchases on a pro-rata basis in-line with the size of the economies of its member states. Therefore, the ECB will likely run out of paper to buy in larger countries like Germany earlier than others. Per the FT, many analysts are starting to speculate that the ECB will have bought every single available bond by the end of 2016.
The mechanics of the ECB’s quantitative easing project means banks and investors believe the central bank cannot keep on buying €80bn of bonds a month as planned — or extend quantitative easing — unless it relaxes rules about what it can buy.
With the eurozone’s recovery proving relatively lacklustre, the ECB has vowed to continue QE at least until March and many economists expect it will be forced to prolong the programme beyond that date.
But credit analysts at banks including Citi, HSBC, Bank of America Merrill Lynch, BNP Paribas and JPMorgan and investors such as Pimco all say the €1.6tn programme is fast approaching a wall, perhaps as early as this year. The trouble is that no one outside the ECB knows how close the wall is.
Citi believes the squeeze is so severe that the ECB will run out of German paper to buy in November, although BofA thinks the programme can run unaltered until the end of the year.
And, as we concluded yesterday, there's only one thing left to do when you've lowered interest rates to below 0% and purchased every piece of sovereign paper possible.