European Yield Curve Collapses On Report ECB Considering "Operation Twist"

Back in April, BofA analyst Barnaby Martin suggested that in order to mitigate the potential fallout from the end of the ECB's QE, the European Central Bank could engage in an "Operation Twist" to flatten the curve and keep term premiums low, or in other words, to avoid chaos for the European bond market.

Overnight, and a little over two months later, Reuters reported that the ECB is indeed considering buying more long-dated bonds from next year as part of its bond reinvestment strategy to keep euro zone borrowing costs in check, effectively copycatting what the Fed did with its own Operation Twist first in 1961 and then again 2011, where the central bank replaced short-dated paper with longer-term debt to lower market interest rates and boost an ailing economy (which begs the question: is the European economy that ailing that the ECB is scrambling to come up with QE extensions even at a time when the Eurozone is supposedly recovering).

In this particular case, the "Twist" would be aimed at limiting the natural aging of its 2.6 trillion euro bond portfolio and keeping a lid on long-term bond yields, a key determinant of borrowing costs, bu maintaining a bid for long-term debt while short-term holdings are sold.

As is well known, while the ECB announced recently it would end its QE (absent major market shocks) in 2019, it will continue to reinvest the money it gets from maturing paper for a long time, to ensure cash in the euro zone remains abundant.

And, according to Reuters, conversations with five central bank sources show policymakers are wary of seeing long-term yields creep back up as the ECB’s stock of bonds ages, or “loses duration” in market parlance. To avoid this, the ECB is considering buying more longer-dated bonds, generally seen as maturing in 10 years or more, with the cash it gets from maturing paper. Additionally, since the ECB remains constrained by how many German bonds are available, the central bank may also smooth out its reinvestments by occasionally deviating from its “capital key” rule, Reuters sources added.

The sources said that any such deviation should be minor and that the main rule behind the contemplated changes is to give the bank more flexibility, not fundamentally alter how cash from expiring bonds is reinvested.

Why Twist and not shift to other securities? Because this option was reportedly seen as a more palatable option than increasing purchases of corporate debt, which have attracted criticism for being too risky after one of the companies the ECB had invested in found itself embroiled in an accounting scandal.

“The idea is to keep the duration of the portfolio as much as possible,” one of the sources said. “So it wouldn’t be the end of the world if we deviated from the capital key.”

To be sure, for now the details are scant and the ECB could be merely testing out another Trial Balloon idea via Reuters, which is clear to point out that the issue was not discussed at the ECB’s June 14 policy meeting, when rate-setters merely tasked ECB committees to come up with proposals; a full decision is expected in July or September.

And while Twist would certainly keep long-rates low indefinitely, and certainly for the duration of the ECB's reinvestments, the problem is that such a move would further cripple European banks who are struggling to make profits at a time when NIRP and QE have collapsed Europe's yield curve, and led to the unprecedented outcome of Deutsche Bank's US operations failing the Fed's stress test.

As expected, the European yield curve collapsed on the news, with the German 5s30s 5bps as much as flatter on the day, as Bond yields across core and semi-core jump, up 5-6bps across the 5-year sector, while the long-end is supported, as the market reprices to adjust for expectations of more ECB purchases on the long end.

As a reminder, two years ago Deutsche Bank was complaining that the ECB is the root of all of the bank's problems. Therefore, it is safe to assume that the biggest European bank will hardly be excited by this particular proposal, which may therefore be shut down by the ECB hawks before too long.

For now however, the global flattening continues as the ECB remains stuck between a rock and a hard place: wanting higher inflation, yet completely unable to unlock the longer-end of the yield curve to price in just that outcome further perverting the "market."

Comments

CuttingEdge Boing_Snap Fri, 06/29/2018 - 07:07 Permalink

Additionally, since the ECB remains constrained by how many German bonds are available, the central bank may also smooth out its reinvestments by occasionally deviating from its “capital key” rule, Reuters sources added.

In layman's terms, thus enabling them to buy shite.

In reply to by Boing_Snap

nmewn Arnold Fri, 06/29/2018 - 06:49 Permalink

I always give bartenders a wide berth. Yeah sure, they may be able to hook you up but ya never know what their ulterior motive is.

Like this dude Ramos who shot up that Baltimore paper, he was a "white-Hispanic" federal employee for the Bureau of Labor (and probable pissed off union member vis-a-vis the SCOTUS ruling...lol) there's no telling what sort of stats he came up with to keep his job or what finally "triggered" him.

Bartenders and statisticians, ya gotta keep an eye on em or they'll slip you a mickey ;-) 

In reply to by Arnold

CuttingEdge nmewn Fri, 06/29/2018 - 07:48 Permalink

Help me out here, nmewn. Please.

You are probably the only one who can.

 

Ramos was a "white-Hispanic"?

Does that mean half white half latino? Or do "racial fractions" only matter when your name is Elisabeth Warren?

 

Would that make Obama a "white negro"? As opposed to America's first all singin' all dancin' black President? How did his white half disappear? Fucking magic?*

 

Only it appears there is only the "white" inference when the dude does bad shit...

...and the irony is this is pretty much what that half white half black cunt Obama did for 8 years anyway.

 

The racial duplicity is an absolute load of bollocks, as are the libtards who propagate it. But funny as fuck watching them twist in the wind to support this, and other, pathetic narratives. Paints a big "C" on all their foreheads for the rest of the world to ridicule.

The truly amazing thing is they are blind to what a bunch of abject cunts they look. Observing their waking from La La Land fantasy could keep the popcorn flowing for years.

 

<edit> *Magic? Hmmm....black magic would explain a lot. Is that racist?

In reply to by nmewn

Last of the Mi… Fri, 06/29/2018 - 06:55 Permalink

I'm always amazed at the ability of people to try to find "a reason to believe", even after the curtain has been pulled back and the little man in the corner has been revealed to be nothing more than a scam.

People will help you pull the curtain back, cover him up, and actually get on their knees to worship the great Oz, knowing full well it's a fantasy. 

Un trucking believable. 

 

nmewn Fri, 06/29/2018 - 07:02 Permalink

And now...deep morning thoughts with...

“As a person, who believes in the Constitution which tells me that I have the right to be myself and do the things I want to do, and I don’t have to listen to what your religion is, and I don’t have to listen to what you want it to be. I have to make sure that as an American citizen, I’m doing the right stuff and taking care of business. I don’t like this line that I as a Democrat, or an Independent or whatever is trying to take away anything from you. I’m trying to hold onto my personal rights so that you can have the rights you want. Because if you take mine, I feel like you’re the one with the problem. If you take my right away from me, to judge what I do for my family and my body, I got a little problem with that. You got a problem. You don’t want people to take your guns? Get out of my behind. Get out of my Vagina. Get out.”

...the 63yr old, Whoopi Goldberg ;-)

TrustbutVerify Fri, 06/29/2018 - 09:30 Permalink

Just like in the United States, Europe's economy would benefit from a reduction of slave wage nation manufactured goods infecting their economy and hollowing out real and useful employment.  Also like the United States, tariffs on these goods would have helped if they had started decades ago.  

The conventional wisdom is Europeans benefited from the foreign made cheaper goods because they were lower in price (even though the goods often last 1/4th as long) In some ways that might be true. But they saved a nickel here and there and that level of comfort somehow allowed them to cede manufacturing to these slave wage labor nations.  Just like the United States did.  

Of course, like in the United States, social spending increased greatly, too,  At least partly because real work jobs were disappearing.  

Imagine the sudden surge in the economies of Europe and North America if they could take some of those manufacturing jobs away from...slave labor wage nations.  

VW Nerd Fri, 06/29/2018 - 10:02 Permalink

If the economic and financial systems are so peachy as the manipulated indexes are trying to persuade the public, why the need to engage in all these ongoing "operations"?  Let rates find their own level and see if the indexes truly are healthy.

VW Nerd Fri, 06/29/2018 - 10:02 Permalink

If the economic and financial systems are so peachy as the manipulated indexes are trying to persuade the public, why the need to engage in all these ongoing "operations"?  Let rates find their own level and see if the indexes truly are healthy.