Wednesday, March 11, 2015

ECB ‘Chasing Own Tail’ as Bond Rates Turn Negative, SocGen Says




While the ECB was said to have purchased debt with negative yields this week, including that of Germany and the Netherlands, its rules preclude buying of securities yielding less than its deposit rate of minus 0.20 percent. 
“It’s like the ECB is chasing its own tail,” Ciaran O’Hagan, head of European rates strategy at SocGen in Paris, said on Tuesday. 
“Yesterday, the Bundesbank could have bought 2018 notes. Today it needs to go out to 2019. The universe of buyable bonds is melting like snow in the spring sun.” 
“While the effective supply of eligible securities is undoubtedly lower than the total amount outstanding, I do believe that it will still be substantially higher than the amounts we intend to purchase,” Coeure said. “We may face a scarcity of bonds, but we won’t face a shortage.”
Seems they are just concerned with buying the bonds with a yield above the -0.2% policy rate with no regard for the magnitude of NIM that will result for the benefit of the institutions.... scary!!!!!

As reported earlier, if losses happen the ECB intends to just sluff off the losses onto the individual NCBs; that would be fun to watch!

Before the March 5 meeting in Cyprus, the ECB compiled a document on the implications of purchasing assets with negative yields, according to two officials. 
Policy makers have the choice to distinguish between losses on capital and losses on interest income, which may allow them to share the latter. Alternatively, they may decide to treat both types of losses equally, leaving them with individual institutions. 
Officials may also work out a compromise that could result in some form of protection against losses. The ECB said in January that agency debt, which will make up 12 percent of public-sector bond purchases, and 8 percent of public-sector debt will be subject to sharing of any losses under QE. National central banks will have to shoulder any losses incurred from the remaining 80 percent. 

This may leave the NCBs in a position where they have no net interest income to operate with and (to them) they will be  as "bankrupt" as Greece and have to go to their respective governments for an appropriation in order to continue to operate the NCBs.  LOL!

I hope someone at the US Fed is watching this over there for "lessons learned" in the face of a possible exit from the QE.

If the Fed were to screw up its "cash flow" like the ECB is currently doing, and have show up on the Capitol steps with its hand out, it would foment a major political crisis where it could end up with all the US psycho libertarian morons having us back on the f-ing gold standard in no time screaming "I told you so!!!".


1 comment:

NeilW said...

The good thing about the bond buying getting sent to the NCBs is that 80% of the German bonds will be bought by the Bundesbank at a 'loss', which means they will get the funding from the German state, and therefore ultimately the taxpayer.

So this is a way of raising taxes on Germany and getting rid of some of their excess savings.

Of course it would be much better if they just spent it, or the ECB accommodated the savings in the manner a bank should. But that would involve taking off the blinkers.