Katja Hettler The Eurosystem’s Monika Znidar asset purchase … · 2018-07-20 · ECB Central Banking Seminar Frankfurt, 13 July 2018 Katja Hettler Lia Cruz Monika Znidar ... Jan-18

The Eurosystem’s asset purchase programme

ECB Central Banking SeminarFrankfurt, 13 July 2018

Katja HettlerLia CruzMonika Znidar

Euro Area Bond Markets SectionDG-Market Operations

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www.ecb.europa.eu ©

Overview

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The Eurosystem’s asset purchase programme

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Public sector purchase programme (PSPP)

Private sector purchase programmes (CBPP3, CSPP, ABSPP)

Introduction

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5 Conclusion and next steps

Securities lending

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Overview

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Introduction

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Securities lending

The Eurosystem’s asset purchase programmes ECB-PUBLIC

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www.ecb.europa.eu © 4

The APP – a bird’s eye view

The expanded asset purchase programme (APP): 4 programmes introduced in 2014 - 2016

Source: ECB.

Timeline of non-standard measures

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The different components of the APP

PSPP represents more than 80% of total APP holdings

At amortized costs, in euro billion(31 May 2018)PSPP 1,992.9CBPP3 254.3CSPP 156.8ABSPP 27.4Total APP 2,431.4

Source: ECB.Last observation: 31 May 2018

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Monthly change in holdings (at amortised cost)


Net APP purchases have been calibrated over time…

Source: ECB. Latest observation: 31 May 2018

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… and the reinvestments of redemptions also play a relevant role

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Realised and expected APP redemptions (rolling 12 month period)


Source: ECB. Latest observation: 31 May 2018.

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Overview

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Introduction

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Securities lending

The Eurosystem’s asset purchase programme ECB-PUBLIC

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PSPP

Euro-area sovereign / Agencies

EU institutions (supranational & institutional)

ECB NCB NCB

10% 80%

90% 10%

Loss-sharing Non loss-sharing % Proportion of purchases

PSPP covers a broad range of government linked entities

PSPP design and modalities (I) ECB-PUBLIC

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• NCB purchases are determined by the ECB capital key, with some flexibility

• Substitute purchases for NCBs are possible to reach capital key• Purchases also at negative yields, below the deposit facility rate only

to the extent necessary• The implementation of the PSPP aims ex ante at market neutrality in

the sense of avoiding dislocations in euro area government bond curves within the minimum maturity of 1 year and a maximum maturity of less than 31 years.

• Blackout period to avoid direct influence on primary market price formation and also important with respect to monetary financing prohibition

• Issue/issuer limits to avoid blocking minority for CACs and to avoid becoming overly dominant player in sovereign bond market

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PSPP design and modalities (II) ECB-PUBLIC

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Insights into the implementation

• Purchases are coordinated within the Eurosystem on a daily basis via chat and teleconference at Portfolio Manager level

• Selection of bonds is based on– Pricing / spread analysis– Limit restrictions – Feasibility considerations– Scarcity in the market – Counterparties inventories and positions

• Trades are conducted with a wide set of counterparties• Purchases are done bilaterally or via reverse auctions• Most purchases in government bonds are done electronically

PSPP - implementation

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10-year euro area government bond yields at record low levels

Euro area bond market developments (I)

VLTRO announcement

Draghi’s London Speech

ABSPP & CBPP3 announcement

PSPP announcement

_______________________________________________________________________________________________________________________________________Source: Bloomberg, ECB Staff calculations. Last observation: 31 May 2018.

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• 2-year French-German sovereign yield spreads increased around French presidential elections in Apr-May 2017, but stabilised and returned quickly to previous levels

• 2-year Spanish-German sovereign yield spread broadly stable, despite political developments in Catalonia in Oct 2017

_______________________________________________________________________________________________________________________________________Source: Bloomberg, ECB Staff calculations. Last observation: 31 May 2018.

Political risks in Europe with (temporary) market impact

Euro area bond market developments (II) ECB-PUBLIC

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-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0%10-year IT10-year DE

0

100

200

300

400

500

600

2011 2012 2013 2014 2015 2016 2017 2018 2019

bps

14

Italian political developments with significant impact on Italian sovereign debt market

IT-DE yield spread

Bond yields

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0

50

100

150

200

250

300

350

Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18

Source: Bloomberg.Last observation: 04 June 2018.

Euro area bond market developments (III)

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Overview

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Introduction

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Securities lending


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ABSPP CBPP3 CSPP

Objectives / motivation

• provide credit to the real economy;

• help lenders diversify funding sources

• Contribute to the revitalisationof a more sustainable securitisation in the euro area

• facilitate credit provision by banks to the real economy

• support financing conditions in the euro area

• strengthen the pass-through of the Eurosystem’s APP to financing conditions of the real economy;

• provide further monetary policy accommodation

Eligible Universe

Mon. pol. eligible ABS (subject to Due Diligence assessment)

Mon. pol. eligible CBs for own use & multi-cédulas

Non-financial and financial corporate securities (excluding

unsecured bank bonds)

Minimum rating CQS3 CQS3 CQS3

Maturity All All 6 months – 30 years

Issue Limit 70%* 70%*/** 33%/70%*/**

Issuer limit No Yes** Yes*

Purchases 1ary & 2ary

market1ary & 2ary

market1ary & 2ary market

(no 1ary for public sector)

Implementation 6 NCBs NCBs and ECB 6 NCBs

Income/Loss Sharing Yes Yes Yes

16* Specific conditions for programme countries apply** Combined Eurosystem holdings from monetary policy and investment portfolios

Private sector parts of the APP: objectives & transparency ECB-PUBLIC

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Private sector parts of the APP: Review

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Since the start of the programmes, several positive developments are to highlight:

1. Broad based spread tightening….

Sources and notes: iBoxx indices. Last observation: 31 May 2018.

Covered bond asset swap spreads, per selected jurisdiction

Spreads of AAA-rated* floating rate RMBS with 5-7 years maturity (bps)

Source: J.P. Morgan. Notes: (*) rating at issuance. Most spreads are over 3-month Euribor. Last observation 31 May 2018.

0

100

200

300

Jan-

14A

pr-1

4Ju

l-14

Oct

-14

Jan-

15A

pr-1

5Ju

l-15

Oct

-15

Jan-

16A

pr-1

6Ju

l-16

Oct

-16

Jan-

17A

pr-1

7Ju

l-17

Oct

-17

Jan-

18A

pr-1

8

IT ESNL IEES-ECB elig. IT-ECB elig.PT-ECB elig.

ABSPPannouncement

ABSPP start

bpsCBPP3 Announceme

nt

CBPP3 Start

-40

10

60

110

160

Jan-

14

Apr

-14

Jul-1

4

Oct

-14

Jan-

15

Apr

-15

Jul-1

5

Oct

-15

Jan-

16

Apr

-16

Jul-1

6

Oct

-16

Jan-

17

Apr

-17

Jul-1

7

Oct

-17

Jan-

18

Apr

-18

bps DE ES IT FR

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… with positive spill overs to non-eligible fixed income securities

Corporate bond spreads in EUR denominated investment grade vs high yield sector

Sources and notes: ICE BAML EUR corporate bond index, ECB calculations. Last observation: 31 May 2018.

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2. Issuance remained healthy or even picked up…

Source: Dealogic, ECB calculations. EUR-denominated benchmark size primary market issuances. Last observation: 31 May 2018.

Covered bond issuance volumes Asset-backed securities issuance volumes

Source: JP Morgan and ECB calculation. Last observation: 31 May 2018.

0

20

40

60

80

100

120

2013 2014 2015 2016 2017 2018 (YTD)

EUR bn AT, BE, DE, FI, FR, NL ES, IE, IT, PT

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… however it is not yet evident that new or infrequent issuers have become more active

Source: Dealogic, ECB calculations. EUR-denominated benchmark size primary market issuances. Last observation: 31 May 2018.

Corporate bond issuance volumesBond issuance by infrequent euro area non-financial corporate bond issuers

Sources: Dealogic, ECB calculations. EUR-denominated primary market issuances. Issuer is considered infrequent if they have no issuance over the previous 5 years. Last observation: 31 May 2018.

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50

100

150

200

250

2013 2014 2015 2016 2017 2018(YTD)

EUR bn

CSPP started in Jun 2016

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5

10

15

20

25

30

35

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2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

(YTD

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EUR bn

CSPP started in Jun 2016

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Experience of the private sector parts of the APP: e.g. of the CSPP

CSPP at work: Eurosystem has bought >1,000 bonds, from all sectors and a variety of countries…

Sources: ECB, Bloomberg. Note: CSPP holdings as of end of Q1 2018. CSPP holdings with a remaining maturity below 6 months are excluded. The numbers may not sum to 100% due to rounding. The eligible CSPP bond universe contains all bonds that are currently eligible for the CSPP.

Split per country, sector and rating is generally in line with market capitalisation

• ECB coordinates purchases, executed by 6 NCBs, specialists in their jurisdictions• To guarantee smooth implementation, there is continuous communication on market

conditions, participation in primary market and of secondary market purchases

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Source: ECB. Last observation: 31 May 2018.

(1) CSPP purchases vary month by month, including split between primary and secondary markets

(2) CSPP holds more of recently issued bonds (holdings per year of issuance)

Source: ECB, Bloomberg. Distribution based on nominal amounts. Last observation 31 May 2018.

… calibration considers market functioning and liquidity impact to ensure market neutrality…

0

1

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9

10

Jun

Jul

Aug

Sep Oct

Nov

Dec Jan

Feb

Mar

Apr

May Jun

Jul

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Sep Oct

Nov

Dec Jan

Feb

Mar

Apr

May

2016 2017 2018

EUR bn Primary market purchases Secondary market purchases

0%

5%

10%

15%

20%

25%

30%

35%

2018

2017

2016

2015

2014

2013

2012

2011

2010

<201

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CSPP-eligible bond universe CSPP holdings

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Source: ECB. Note: Index: June 2016 = 100. Last observation: 31 May 2018.

(3) Evolution of the average CSPP trade size suggests that liquidity conditions have remained adequate

(4) Contribution of private sector programmes overtime illustrates flexibility in implementation

Source: ECB. Last observation: 31 May 2018.

60

70

80

90

100

110

120

130

140

Jun-

16

Sep

-16

Dec

-16

Mar

-17

Jun-

17

Sep

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Dec

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Mar

-18

Index average trade size

…flexibility is the key

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

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10

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Mar

-15

Jun-

15

Sep

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Dec

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Mar

-16

Jun-

16

Sep

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Dec

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Mar

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Jun-

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Sep

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Dec

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Mar

-18

EURbn Total APP % of private sector purchases (rhs)

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Overview

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Introduction

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Securities lending


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Flexible set-up of the Eurosystem facilities

• Aim: To support bond and repo market liquidity without unduly curtailing normal repo market activity

• Common principles and pricing rules• Decentralised implementation Balance between harmonisation and adjustments to local markets

• Primarily targeting market makers• Strategic and fails lending facilities• Monitoring the markets and the usage of facilities To ensure the ongoing effectiveness

• Changes in parameters introduced when deemed appropriate

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APP securities lending ECB-PUBLIC

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Parameters of the ECB securities lending have been adjusted over the years

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APP securities lending

Date Decision / Event DescriptionApr 2016

Significant amendments of parameters

• Move to open repo• More favourable pricing schedule and lower

fails feeNov 2016

More flexibility in timelines for borrowing

Settlement possible at T, T+1 and T+2 (used to be only T+1)

Dec 2016

Introduction of PSPP SL versus cash

7 Eurosystem members (including the ECB) started accepting cash collateral (currently 9), overall limit of EUR 50bn

Dec 2016

Pricing of lending versus security collateral

Minimum spread lowered from 30 bps to 10 bps

May 2017

Introduction of term repo up to 2 weeks and change in cut-off time

In addition to open repo, borrowing on term repo basis introduced (up to 2 weeks) and longer cut-off time for returning bonds

Mar 2018

Increase in cash collateral limit

Limit on cash collateral received versus PSPP securities lending up from EUR 50 bn to EUR 75 bn.

Note: The marked changes were applied to the entire Eurosystem.

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Eurosystem PSPP on-loan balance rather stable this year, lending vs cash declining recently

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Average balances over the month in euro billion

Source: ECB. Latest observation: 31 May 2018. Note: Includes average on-loan balance of SMP holdings.

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Secured market functioning has improved recently

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Repo rates in selected jurisdictions

Source: BrokerTec. Latest observation: 31 May 2018.

-6

-5

-4

-3

-2

-1

0

Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18

% Italy Germany France Spain

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Overview

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Introduction

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Securities lending


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Conclusions and next steps

The APP, alongside other measures, has been instrumental in providing an adequate degree of monetary policy accommodation;

The operational set up of the several components of the APP is sufficientlyflexible to allow for market neutrality;

More responsive APP securities lending has led to increased lending volumes, coinciding with diminishing repo-market tensions;

Monthly pace of the net asset purchases is now €30 billion per month, and it is anticipated that, subject to incoming data confirming the Governing Council’s medium-term inflation outlook, it will be reduced from October to December 2018 to €15 billion;

Positive net purchases will then end but reinvestments of principal payments will continue for an extended period of time and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

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Documents

Katja Hettler The Eurosystem’s Monika Znidar asset purchase … · 2018-07-20 · ECB Central Banking Seminar Frankfurt, 13 July 2018 Katja Hettler Lia Cruz Monika Znidar ... Jan-18