Analysts Respond To "Unsourced" Reports Of Open-Ended ECB Monetization

For whatever reason, yesterday's unsourced Spiegel report that the ECB is actually contemplating open-ended monetization with arbitrary yield targets on various European nations is the talk of the town, if only for a few more hours until, just like last year, the proposal is summarily dismissed, only to be reincarnated once Spanish yields pass north of 8% again. In the meantime, it has allowed those very well paid sell-side strategists to present their erudite opinions, which naturally do not matter in the grand (and not so grand) scheme of things as long as Germany sticks to the 9-9-9 plan.


  • German press is talking of yield limits set by ECB; this is unlikely, but also clear ECB is closer to doing something more dramatic to contain things, Padhraic Garvey, strategist at ING, writes in note
  • Spain and Greece are where biggest problems lie at this juncture, while Ireland, Portugal and Italy are in better shape
  • Trading is very light, difficult to conclude anything from this at this point


  • The Spiegel report is still preliminary; eurosystem committee is most likely considering cap on spreads as one of a number of options in line with the Governing Council’s decision on Aug. 2 to design measures to “repair monetary policy transmission”, Julian Callow, economist at Barclays, writes in note
  • Would be surprised if council were to decide on Eurosystem purchases which went beyond short-end of govt curve
  • Such reports suggest moving toward forceful purchase program with combined forces of ECB and EU funds next month though formal decision may not be taken until Sept. 14


  • An ECB yield/price target is unlikely for numerous reasons, Sue Trinh, strategist at RBC, writes in note
  • Impossible to determine exact fair level; putting a number on it means ECB would need to explain how it derived the figures  and reasons for differences between countries
  • Without an announced yield target, it will have to follow a quantitative target
  • Effectiveness of such an intervention remains to be seen, especially in increasing share of foreign holdings of Italian/Spanish bonds

Standard Bank:

  • Wouldn’t be surprised to see spread limit idea used, Steven Barrow, strategist at Standard Bank, writes in note
  • Several ECB members, especially Germany, have a huge problem with ECB buying large amounts of bonds; Draghi may suggest that a limit on spreads will restrict the amount of actual intervention as mkts will observe the limits
  • Such measures could be positive for periphery bonds but only in the case where a bailout is requested; for that to happen, bonds may have to undergo some stress


  • After the talk of “major” buying if a country sought EFSF/ESM help, this latest story on ECB placing threshold above which it will buy shorter-dated peripheral bonds, is another twist, Kit Juckes, strategist at SocGen, writes in note
  • Can’t see how this will play well at Buba
  • As long as there is the sense that Draghi will somehow get ECB to buy bonds and Merkel is giving her support, the risk mood will be helped


  • Expect the reports of ECB yield/spreads cap this morning to be the first of many leaks that will result in considerable volatility in coming wks
  •  Potential for huge political pressure if spread for Italy is set at lower levels than Spain

source: Bloomberg


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