ECB falls short of target for purchasing Irish and German bonds

European Central Bank data showed it fell short of its target for purchases of Irish and German bonds under its quantitative-easing programme for a third straight month in June, while favouring French and Italian securities as it combats a shortage in the euro region's benchmark sovereign debt.

The ECB purchased €518 million of Irish bonds in June compared with €516 million in May, according to investment firm Cantor Fitzgerald.

The level of Irish purchases once again below the 1.65 per cent adjusted capital key ratio with Ireland accounting for just 1.12 per cent of the overall June purchases.

Bloomberg calculations based on ECB data show the central bank exceeded its implied target for purchases of French bonds by €1.19 billion, and that of Italy's by €980 million, both countries that have relatively large outstanding debt. It fell short of its target on Finnish and Portuguese securities along with the Irish bonds. Italian 10-year bonds gained after the release, with yields dropping as much as four basis points to Tuesday's low of 2.10 per cent.

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Fudging

The ECB has been fudging its own bond-buying guidelines, known as the capital key, with ECB president Mario Draghi reiterating in a press conference last month that the asset-purchase programme has enough "flexibility". A shortage of available bonds in countries such as Ireland and Portugal has seen this shortfall made up with an increasing share of French and Italian bonds. Germany is the latest name added to the list, and may reflect some concern that the ECB is running out of bonds there too.

According to Cantor Fitzgerald, at the current €500 million per month purchase rate, Ireland can continue to benefit from ECB purchases for another 10 months, on certain conditions.

The ECB's holdings in "German bunds are approaching the 33 per cent limit," Anton Heese, a fixed-income strategist at Morgan Stanley, wrote in a client note. According to Morgan Stanley estimates, the ECB can purchase about €80 billion more of bunds "before breaching the 33 per cent issuer, issue limit," he wrote before the latest ECB data were released.

“This implies that at the current pace of €60 billion per month – of which about €9.5 billion is in bunds – the programme can carry on till February or March 2018,” Heese said.

The ECB data came less than a week after euro-zone bonds plummeted in reaction to comments from Draghi, who said that reflationary forces had replaced deflationary ones, which the market perceived as a sign that the central bank could announce tapering in September. – (Bloomberg)