August 6, 2018 / 3:40 PM / a year ago

UPDATE 1-ECB focused on longer-dated papers in QE last month

 (Adds detail)
    FRANKFURT, Aug 6 (Reuters) - The European Central Bank
continued to skew its government bond purchases towards the
longer end of the yield curve last month, broadly maintaining
the average remaining maturity of its massive debt pile, data
showed on Monday.
    With the ECB due to stop buying new bonds from next year,
some policymakers including chief economist Peter Praet have
argued that the natural ageing of its 2.5 trillion euro debt
pile would weaken stimulus over time, a potential argument to
target longer-dated papers to keep borrowing costs down.
    Indeed, the remaining maturing of its government bond
portfolio was 7.58 years at the end of July, down from 7.59
years a month ago, remaining broadly steady over the past four
months and indicating that buys last month had a maturity well
in excess of 10 years. 
    That is a big change from previous quarters, when the
average duration of the portfolio dropped slowly but steadily,
raising some concern that such a "duration leakage" would reduce
ECB support and make it desirable to reinvest cash from maturing
debt with a focus on the long end of the curve.
    The bank is due to have a broader discussion of its
reinvestment policy at one of its upcoming meetings and sources
close to the discussion said that one of the issues on the table
would be whether such a focus on longer papers was necessary.
    Still, even before such a discussion takes place, data is
suggesting that the bank is already doing such a tweak,
arresting the drop in duration happening since a peak of 8.37
years in October 2016. 
    While the natural erosion would weaken stimulus, some have
argued that pushing down long-term borrowing costs would flatten
the yield curve, hurting banking profitability and creating
unrealistic expectations about future policy rates.
    The ECB has said it would reinvest proceeds from maturing
debt in the same jurisdiction within three months. 
    It has pledged to be market neutral – that is to buy
individual bonds in proportion to their outstanding amount –
while retaining some flexibility based on “the relative values
of bonds and the liquidity of the different maturity segments”.
    Among its monthly purchases, the ECB bought more German and
Spanish papers than its own rules would dictates, primarily at
the expense of Dutch papers, which fell sharply compared to
previous months. 
    Monthly purchases fluctuate, however, and they are also
influenced by redemptions. The ECB has long said that its focus
was on buys over the duration of the programme and monthly
fluctuations are of a technical nature and not policy

 (Reporting by Balazs Koranyi
Editing by Alison Williams)
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