The European Central Bank has been pumping stimulus into the eurozone economy for over two years. As part of their quantitative easing measures, the bank’s policymakers have promised to “reinvest” the money they make from maturing bonds back into the debt market.
Despite talk of “tapering” dominating markets, more and more bond redemptions are due over the coming years, and thus increasing reinvestment is on the cards. Analysis from Nordea shows these “silent” ECB measures will have one principle beneficiary: Germany.
With the ECB snapping up 2-year debt in March 2015, the first of its redemptions took place earlier this year and will steadily build in the months to come.
“As we approach the end of 2017 and heading into 2018, reinvestment will pick up markedly and consequently, it will become an increasingly important factor in the ECB’s policy stance”, notes Piet Philip Christiansen, rates strategist at Nordea.
He calculates that reinvestment flows will hit at least €120bn in 2018. Of this, around €42bn will be pumped back into the Bund market – a third of the total flows (see chart below).
That’s not altogether surprising. Germany is the biggest economy in the eurozone and receives the largest proportion of ECB bond-buying under the central bank’s “capital key” rules. Like its eurozone counterparts, German borrowing costs have been driven to record lows as the central bank has had an oversized presence in the eurozone debt markets.
Nordea’s numbers show the ECB will have bought €450bn of German bonds since March 2015 by the end of this year. Strikingly, that is nearly equal to the €471bn issued by the German debt office during the same period.
For all the persistent grumbling from Berlin’s economic establishment, the period of eurozone QE has coincided with record low unemployment in Germany and still robust economic growth. The German economy has only suffered four quarters of economic contraction since mid-2009.
But one country that is not expected to feel the reinvestment love is Italy. Nordea’s calculations show flows back into Italian bonds will be around €20bn – half that of German reinvestments.
“The reinvestment flow will mainly support the core countries, such as Germany and the Netherlands and not Italy (although this is likely higher on Draghi’s wish list), so spread widening is warranted”, adds Mr Christiansen.
He thinks that any announcement of tapering – which could come as early as September – would lead to an “initial knee-jerk reaction” in the bond market.
But ultimately, with the ECB taking a gradual approach to its wind down, and importantly maintaining its presence in the market through reinvestment, a massive market sell-off “is expected to be contained”, he adds.