Mario Draghi, president of the European Central Bank speaks during a news conference at... Read More
At 3:30 p.m. in Frankfurt, the European Central Bank will reveal how much it spent on covered bonds last week after returning to that market for a third time as part of a renewed bid to stave off deflation.
The central bank bought at least 800 million euros ($1 billion) of assets from Portugal to Germany in the three days since the program began on Oct. 20, traders said last week. Formal details will help them divine how quickly the ECB president can reach his target of expanding the
institution’s balance sheet by as much as 1 trillion euros.
“In terms of the ECB’s aspiration to expand its balance sheet, the market wants it all now,” said Richard Barwell, senior European economist at Royal Bank of Scotland Group Plc in London. “There’s scope for immediate disappointment to the scale of the purchases we see today.”
With the economy stuttering and inflation forecast to have stayed below 1 percent for a 13th month in October, Draghi is under pressure to do more. While central banks from the U.S. to Japan used large-scale asset purchases to bolster their balance sheets and kick-start lending, the ECB has so far refrained from such a step.
Sovereign Bonds
German opposition to sovereign-bond purchases means officials have chosen covered bonds and asset-backed securities as the latest tools to help expand the balance sheet. While policy makers say their plans will spark new issuance, economists at firms including Morgan Stanley and Commerzbank AG say the central bank will probably need to buy other assets to reach the target.Of the region’s 2.6 trillion-euro covered-bond market, the ECB will only buy assets eligible under its collateral framework for refinancing loans, denominated in euros and issued by credit institutions in the euro area. Purchases will be announced weekly, starting today, and the pool of bonds eligible is about 600 billion euros, ECB Vice President Vitor Constancio said this month.
ABS buying is scheduled to begin later this quarter and there are about 400 billion euros of such assets eligible to buy, according to Constancio.
“Covered bond and ABS purchases appear to be the line of least resistance for the ECB,” said Jon Mawby, a London-based fund manager at GLG Partners LP, which manages $32 billion. “In reality, it is what follows that will be important, or maybe more importantly, what doesn’t follow.”
Stimulus Opposition
So far, officials from Bundesbank President Jens Weidmann to Belgian central bank governor Luc Coene have said they want to judge how well the measures are working before considering other options. Governing Council member Ardo Hansson said policy makers should refrain from additional measures as current stimulus works its way through to the economy.While the ECB was successful in completing a program for 60 billion euros of covered bonds started in 2009, it struggled in a second round to meet a 40-billion euro target, buying only 16.4 billion euros. So far this round, the central bank has only bought in the secondary market, according to people familiar with the purchases.
“Most people would like them to do a lot more, and the general consensus is that there aren’t enough covered bonds in issue at the moment,” said Craig Veysey, head of fixed income at Sanlam Private Investments Ltd. in London. “If the ECB can’t find enough to buy then the market will start speculating that they will have to buy corporate and government bonds as well.”
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