May 9, 2017 / 3:11 PM / 3 years ago

German bond scarcity could tip the ECB taper debate, data suggests

* Analysts- ECB bought less German debt than rules allow in April

* Average maturity of German bonds purchased for ECB QE falls

* Sign of scarcity of eligible German debt

* German bond scarcity may provide incentive for ECB taper

* Graphic:

By Dhara Ranasinghe

LONDON, May 9 (Reuters) - As fading political risks and a stronger economy fuel talk that the ECB may scale back its massive monetary stimulus, analysts say data highlighting a scarcity of eligible German bonds for purchase under the scheme could help sway the debate.

Based on ECB bond-buying data published last week, some analysts calculate that the European Central Bank bought roughly 400 million euros fewer bonds in Germany in April than its rules allow.

These figures exclude other than government debt and adjust Germany’s target to strip out Greece, which is not eligible for the 2.3 trillion euro ($2.5 trillion) scheme.

The shortfall raises questions about how close the ECB is to hitting its bond-buying limits in Germany, the euro zone’s benchmark issuer and the biggest source of bonds under the scheme.

It also comes as investors shift their focus to a potential gradual reduction, or “tapering”, of the ECB’s quantitative easing (QE) programme and to U.S. Federal Reserve rate hikes now that political risks linked to France’s elections are fading.

“It was by far the largest deviation, at least for Germany, and for me suggests that on top of the political stress and smoothing of purchases, there are scarcity constraints for the Bundesbank,” said Pictet Wealth Management senior economist Frederik Ducrozet.

“What it means is that the ECB has to be very cautious with its exit and if they don’t taper within less than six months (of ending the programme) something might have to give. That’s where the data for April is so interesting.”

The stimulus programme is due to run until the end of 2017.

Bank calculations based on the data also show that in just six months, the average maturity of monthly German debt purchases by the ECB has dropped to under five years from more than 10.

That suggests a shortage of longer-dated eligible debt is forcing Germany’s Bundesbank, which acts on behalf of the ECB, to take advantage of recent rule tweaks to buy more shorter-dated bonds.

While that shift was expected after a change allowing the ECB to buy bonds yielding less than the minus 0.40 percent depo rate, the speed at which the Bundesbank put that to use has taken markets by surprise.


ECB asset purchases are based on the so-called capital key — it buys a country’s bonds in line with the size of its economy — making Germany the biggest source for the scheme.

Many banks expect the ECB to push up against a self-imposed limit that prevents it from holding more than 33 percent of a country’s eligible bonds around year-end.

In reality, the central bank can be flexible and smooth out its purchases and in the past it has shown it can get around technical hurdles.

The ECB has already deviated from the capital key in Ireland and Portugal, where it is running out of bonds to buy.

“The deviations elsewhere have been consistent except for Germany,” said ABN AMRO senior fixed income analyst Kim Liu.

He also estimated the ECB deviated from the capital key in Germany by around 400 million euros in April when excluding corporate and covered bond purchases and adjusting for Greece.

Liu said the average maturity of monthly German purchases, which ABN and others calculate at 4.72 years for April, is also something to watch carefully.

“This means that the average maturity of monthly German purchases remains much lower than those of other countries and that the Bundesbank continuously is forced to buy short-dated bonds with yields that are below the ECB’s deposit rate,” he said.

The bond scarcity in Germany shows that the ECB would struggle to extend the scheme without further changes to its own bond-buying rules.

The monetary policy debate in the eurozone has also changed over the past six months.

On Monday, board member Yves Mersch said the ECB was close to replacing its negative view on whether the euro zone economy would reach growth targets with a neutral one.

ECB monthly asset purchases fell by 20 billion euros to 60 billion euros in April, while money markets price in roughly a 70 percent chance of a rate hike in early 2018.

“The ECB can always get around its rules, it has the flexibility on whether to buy central government or local government or agency debt to fulfill its quotas,” said Marchel Alexandrovich, senior European economist at Jefferies.

“But the longer QE goes on, the more the ECB will have to think about changing the rules again ... And the issue now is the willingness to carry on with QE.”

Graphic by Nigel Stephenson and Ritvik Carvalho; Editing by Gareth Jones

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