This month marks the one-year anniversary of the ECB QE program, but it appears as if some things aren’t going as planned. Bank of America Merrill Lynch strategists explain, however, that it’s important to look beneath the surface and that the program is having mixed results thus far with success in some areas but unintended results in others.

The European Central Bank just announced plans to increase corporate bond buying in light of these mixed metrics, although there’s debate about whether it will be enough.

ECB QE not impacting Eurozone as desired

BAML Rates Strategists Ruairi Hourihane and Ralf Preusser summed up changes in some key Eurozone economic metrics in in a March 23 report titled “ECB QE, one year on.” They say that most of those metrics have not behaved as would be expected:

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For example, they note that front-end yields have outperformed since the beginning of the ECB QE program, which is interesting because the front end isn’t eligible for purchase. They said investors at the front end of the core curves have benefited from the ECB’s deeper rate cuts and from the market’s expectations of these cuts.

Mixed results in peripheral spreads

They also noted a widening in peripheral spreads on an absolute basis, which again runs counter to expectations. They attribute this to continued policy uncertainty and the Bank of Japan’s rate cut, which they think the market saw as global quantitative easing hitting its limit. Hourihane and Preusser do say though that the ECB QE program has been successful when looking at peripheral spreads against the performance of other credit assets that aren’t being bought.

They note that since the QE program began, peripheral spreads have become more insulated from widespread weakness in other credit assets as the relationship between the two began to be reduced.

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What about swap spreads?

The BAML team also found mixed answers in their review of asset swaps, which have tightened since the beginning of the ECB QE program. They attribute this surprising move to the “aggressive rate selloff” that happened in May and June 2015. Corporate issuance also shot upward on the back of low outright yields due to rising swap space pressure.

On the other hand, when looking at European spreads compared to those in the U.S., they’ve widened. This is progress in weakening the link between the euro and the U.S. dollar.

One year of sovereign bond purchases

The BAML team said that over the past year, core banks in the Eurozone haven’t contributed much to bond sales in the ECB QE program, noting that the central bank has been depending heavily on central banks in emerging markets and other sellers from outside the region. This is perhaps one of the biggest reasons to question whether the ECB QE is effective. They use data from Eurozone monetary financial institutions (MFI) to reach this conclusion:

“As the ECB pays for the assets it purchases by supplying reserves, purchases are always settled through banks regardless of who the ultimate seller is,” they wrote. “As a result, Eurozone MFIs’ net external assets, which reflect the size of banks’ intermediation in these QE sales by non-euro area residents, have declined by a sizeable €175bn in the same period… indeed pointing to significant sales by such foreign participants.”

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Euro Area Balance of Payments statistics support this view as well:

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They argue that bond sourcing problems could eventually develop as a result of the negative deposit rate in the event that emerging market reserve selling stalls.

What about the next phase of the ECB QE program?

The good news is that based on second quarter expectations and increased purchases, they don’t believe the Bund shock that ripped through the Eurozone will happen again this year. Hourihane and Preusser believe the range of 25 to 50 basis points will remain stable and caution that the yield curve could flatten even further amid “huge negative net issuance across the Eurozone throughout April.”

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However, they warn that the next phase of the ECB QE program, which includes increases in corporate bond buying, may not be adequately priced in the forward guidance. As a result, they think the 2s-5s and 10s-30s curves will flatten even more, especially when bond buying increases in April. They see this area as possibly benefiting the most from the increased bond buying.