20 Nov 2015
ECB QE: Broader-than-expected rise in issue share limit - BAML
FXStreet (Guatemala) - Analysts at Bank of America Merrill Lynch explained that at the ECB's meeting in September, the ECB announced it will increase the limit on how much it can buy of each bond issue, from 25% to 33%, “subject to a case-by-case verification that this would not create a situation whereby the Eurosystem would have blocking minority power, in which case the issue share limit would remain at 25%”.
Key Quotes:
"Back then, we highlighted it was still unclear whether the increase would apply to bonds with Collective Action Clauses (CACs). However, since then, market consensus seemed to have moved toward the more restrictive interpretation, assuming an increased limit only for non-CAC bonds.
The corresponding legal act published yesterday came therefore partly as a surprise to the market, as it clarified that the ECB will be able to increase the issue share limit to 33% for all bonds, even those containing a CAC, unless it differed from the model CAC introduced for Euro govies in 2013. There are two consequences to this upside surprise:
The potential for a longer/larger QE expansion without major tweaks to the QE design has increased slightly. Updating our calculations from two weeks ago (ECB: why it’s back to the drawing board?), we find that on the basis of current yield levels (ie, with German bonds trading above the deposit rate from the 3.9y maturity), an €80bn/month QE would be able to run up to end of Mar-17, that is three months longer than if the issue limit were kept at 25% for CAC bonds.
Under the current QE program, and over the coming weeks, the potential for the Bundesbank to concentrate further its purchases in the 5-10y part of the German curve has increased. There, 57% of the outstanding notional corresponds to CAC bonds. "
Key Quotes:
"Back then, we highlighted it was still unclear whether the increase would apply to bonds with Collective Action Clauses (CACs). However, since then, market consensus seemed to have moved toward the more restrictive interpretation, assuming an increased limit only for non-CAC bonds.
The corresponding legal act published yesterday came therefore partly as a surprise to the market, as it clarified that the ECB will be able to increase the issue share limit to 33% for all bonds, even those containing a CAC, unless it differed from the model CAC introduced for Euro govies in 2013. There are two consequences to this upside surprise:
The potential for a longer/larger QE expansion without major tweaks to the QE design has increased slightly. Updating our calculations from two weeks ago (ECB: why it’s back to the drawing board?), we find that on the basis of current yield levels (ie, with German bonds trading above the deposit rate from the 3.9y maturity), an €80bn/month QE would be able to run up to end of Mar-17, that is three months longer than if the issue limit were kept at 25% for CAC bonds.
Under the current QE program, and over the coming weeks, the potential for the Bundesbank to concentrate further its purchases in the 5-10y part of the German curve has increased. There, 57% of the outstanding notional corresponds to CAC bonds. "