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In first for ECB Draghi easy money era, bond supply to match ECB demand
December 7, 2017 / 9:43 AM / 7 days ago

In first for ECB Draghi easy money era, bond supply to match ECB demand

* Slowdown in ECB buying key for balance of bond supply

* Net adjusted bond supply +3 bln euros in 2018: ABN AMRO

* Has been negative for 3 years

* Weight of ECB buying still important for bond yields

By Dhara Ranasinghe

LONDON, Dec 7 (Reuters) - Euro zone governments could issue more bonds next year than the European Central Bank is likely to buy for the first time since before the central bank launched its massive stimulus to boost growth and inflation in the single currency bloc.

ECB monthly asset purchases are set to halve in January to 30 billion euros for nine months as the bank starts to unwind the extraordinary monetary stimulus launched in 2015 that has pulled down borrowing costs.

The ECB will still suck up new euro zone bond supply, while the overall stock of ECB bond purchases will remain a powerful force keeping bond yields from rising too far.

But analysts expect to see the first signs that the central bank’s heavy influence in one of the world’s biggest bond markets is starting to ebb as quantitative easing in the bloc enters its a fourth year.

For the past three years, the weight of ECB buying has meant net bond issuance -- after central bank purchases -- has fallen as much as 400 billion euros, according to some estimates. That has created a shortage of bonds, pushing a large chunk of the market into negative yielding territory.

“This year, ECB buying is much bigger than net issuance, next year ECB buying is roughly in the same ball park as net issuance,” said Seamus Mac Gorain, fixed income portfolio manager, JPMorgan Asset Management.

ABN AMRO forecasts net issuance will nudge into positive territory for the first time since before the ECB embarked on quantitative easing.

It estimates that net adjusted bond supply will up end up at 3 billion euros next year versus a decline of almost 300 billion euros this year.

Even banks that believe ECB demand will still exceed the new supply see the mismatch reducing dramatically.

DZ Bank said if new net purchases are discontinued at the turn of the year 2018/19, the net issuance volume adjusted for ECB purchases comes to minus 63 billion euros, having stood at minus 407 billion euros in the previous year.

“The eurozone government bond market will be supported significantly in 2018 as the ECB will virtually take away all of the new supply flow,” said ABN AMRO senior fixed income strategist in Amsterdam Kim Liu.

“This comes on top of the already existing inventory on the ECB’s balance sheet. However, this is still less favourable than in 2017.”

DIVERGENCE

Bond strategists expect sharp divergences in the supply and impact of ECB bond buying to show up across the region.

France and Italy were two countries in particular that were forecast to see supply outweigh ECB purchases next year.

France, one of the first euro zone countries to provide details of its 2018 borrowing plans, said in September it would lift bond issuance next year as the state budget deficit and redemptions rise.

It will issue 195 billion euros of medium and long-term debt next year net of buybacks, up from 185 billion euros this year.

“We estimate that net supply minus ECB bond buying will be 32 billion euros, the first positive figure since 2014,” said Mizuho rates strategist Antoine Bouvet.

In contrast, net supply in Germany and the Netherlands when ECB asset purchases are taken in to consideration, were expected to remain in negative territory.

In the Netherlands, an economic recovery, additional cash flows from the sale of private assets had reduced the state’s need to borrow money and means net bond supply is expected to be negative for a third straight year.

Shrinking bond markets in these two “core” euro zone countries is a reason why ECB bond buying was expected to keep bond yields at relatively low levels.

“Relating our issuance estimates to the anticipated ECB purchase activities next year it becomes clear that the central bank’s buying flow still remains an important factor, even after net monthly bond volumes will have halved,” said Benjamin Schroeder, senior rates strategist at ING.

More generally, overall euro zone debt supply was expected to fall given stronger economic growth and better public finances.

Commerzbank, ING and ABN AMRO Bank expect debt sales to decline by 40-75 billion euros across the 19-member bloc in 2018.

Reporting by Dhara Ranasinghe; Graphics by Ritvik Carvalho; Editing by Angus MacSwan

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