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ECB Begins QE Stimulus Program
World Economy

ECB Begins QE Stimulus Program

The European Central Bank started buying government bonds under its expanded quantitative-easing (QE) plan designed to boost price growth in the region.
Central banks bought German and Italian debt, according to at least two people with knowledge of the transactions, who asked not to be identified because the information is private. They also purchased Belgian securities, one of the people said, and a separate person said French notes were being acquired, Bloomberg reported Monday.
Bonds rallied. The yield on Germany’s 10-year bunds fell five basis points, or 0.05 percentage point, to 0.35 percent at 10:30 a.m. London time, approaching the record-low 0.283 percent set on Feb. 26. Italy’s 10-year yield declined three basis points to 1.29 percent.
Anticipation of the 1.1 trillion-euro ($1.2 trillion) plan already fueled a debt-market rally that sent yields in the 19-nation currency bloc to all-time lows. ECB President Mario Draghi said in Cyprus last week that the stimulus will spur the euro area’s fastest economic growth in seven years and help return inflation to the ECB’s goal.

  Scarcity Concern
Speculation over the impact of the quantitative easing program has dominated trading of euro-area bonds since it was announced in January. Some holders of government securities have indicated an unwillingness to sell, sparking concern that there will be a scarcity of available debt for the ECB to buy. There’s also a risk that flexibility and limited information on the plan stirs market volatility.
The ECB said last week that the purchases, which are to include public and private debt, will be conducted in the secondary market by national central banks via existing counterparties. That’s in contrast to the Federal Reserve’s approach, which involved a calendar telling dealers what it intended to acquire and when.
While the ECB has said that only securities due between a minimum two years and a maximum 30 years and 364 days at the time of purchase will be eligible, national central banks will have some wiggle room as they carry out purchases within their home markets, allowing them some choice between government and agency debt.
Borrowing costs in the euro area have plunged on concern the plan may lead to a limited availability of fixed-income assets. The average yield to maturity on the region’s government debt reached 0.538 percent Feb. 26, the least since at least 1995, according to Bank of America Merrill Lynch indexes.

  Balance Sheet
About 45 billion euros a month will probably be spent on sovereign debt, a central bank official said Jan. 22. That implies an intention to purchase 14 percent of euro-area government bonds outstanding by September 2016, or 18 percent of securities from Finland, Germany, Luxembourg and the Netherlands, the only nations with two or more AAA ratings from the three major credit-assessment companies.
To rekindle inflation in the euro area, Draghi has said the central bank intends to expand its balance sheet toward 3 trillion euros. Since October, when it announced details of plans to purchase covered bonds and asset-backed securities, the ECB’s balance sheet has grown from 2.05 trillion euros.
It took the Fed almost six years, and three rounds of quantitative easing, to boost its holdings to about 20 percent of US Treasuries.
Reduced government spending is likewise contributing to a global dearth of sovereign debt. Germany is due to curb the amount of conventional bonds outstanding by 8 billion euros this year. In Spain, where Prime Minister Mariano Rajoy’s People’s Party has implemented the deepest austerity measures in the nation’s democratic history, the net issuance target for 2015 is 55 billion euros, down from net sales of 97 billion euros in 2012.
With austerity measures and ECB buying, the euro-area sovereign-bond market will shrink by 259 billion euros in 2015, Morgan Stanley strategists, including London-based Neil McLeish, Anthony O’Brien and Serena Tang, forecast in a report in February.

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