The European Central Bank will be celebrating an important landmark next month. In little more than a year, the central bank has been able to increase access liquidity in the European banking system from about €150 billion (March 2015) to €983 billion today. The primary driver of this liquidity growth has been the central bank’s QE policy, which should take excess liquidity above the €1 trillion marker next month.
The current size of the ECB’s balance sheet and sheer volume of liquidity the bank has created over the past 12 months is the subject of a fixed income research report from the HSBC Global Research centre, sent to clients yesterday.
The report, which was authored by HSBC strategist Bert Lourenco, points out that liquidity created by the ECB’s asset purchase programs already exceeds €1.1 trillion. The majority of this gain can be attributed to the bank’s implementation of the public sector purchase programme (PSPP) and corporate sector purchase programme (CSPP).
Assets acquired under the PSPP already amount to a little under €1 trillion. As Bank of America reported last month, via the CSPP the ECB has already acquired 458 bonds across the board, leaving virtually no stone unturned. The bank bought a range of credit across the rating spectrum including low-BBB rated names, high-yield credit and debt belonging to high-profile companies such as VW, Glencore, and EDF. Around 35% of the bonds purchased under the CSPP have negative yields. Buying is currently hovering around the €8.5 billion per month mark.
ECB’s balance sheet next stop €5trn?
Lourenco makes the point that while the ECB has acquired under €1 trillion in bonds under the PSPP, the program’s impact on inflation has been negligible. Granted the program has been highly instrumental in driving yields lower but with the ECB’s balance sheet now standing just shy of €4 trillion, central bank governor Mario Draghi appears to be running out of options.
Adding another €1 trillion in bonds to the ECB’s balance sheet is unlikely to take inflation back to target and finding another €1 trillion of bonds to purchase will put further pressure on changing the current programme’s rules. There could also be increasing calls for the program to acquire a bigger portion of private-sector securities.
Reuters reports that the ECB’s aggressive asset purchases are already causing problems in the financial sector. Aside from the fact that negative bond yields are wrecking havoc with pension plans around the world, the ECB’s increasingly longer maturity bond purchases are forcing public sector issuers to print more and longer-dated debt.
Data published this week shows that the ECB has extended the weighted average maturity of the public debt it’s acquiring to its longest since the PSPP began in March last year. This is becoming a problem for some debt market participants:
“In the non-profit SSA world, where liabilities and assets need to match as closely as possible to create a seamless cycle of funding and lending known as ALM, being forced into specific maturities is a problem for some issuers.
“We always look at longer maturities from an ALM perspective,” said Olma at Rentenbank. “Anything between eight and 15-years is always an interest, but we prefer not to go any longer.”
Yields have fallen so far negative that the shorter end of the euro curve is completely closed to SSA issuers…” – Source: Reuters