Kieran Leonard including reinvestment · 2019-07-17 · Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18

The Eurosystem’s asset purchase programme, including reinvestment

Christophe Beuve Head of division Bond Markets & International Operations Katharina Plessen-Mátyás Bond Markets and International Operations

13th ECB Central Banking Seminar July 2019

Kieran Leonard Bond Markets and International Operations

1

The views expressed are those of the presenters and do not necessarily reflect those of the ECB.

1 APP Overview

Overview

2 APP operational goals

3 Implementation of reinvestments

4 Conclusion

2

1 APP Overview 1 APP Overview

Overview



4 Conclusion

3

-1.75

-1.50

-1.25

-1.00

-0.75

-0.50

-0.25

0.00

0.25

Jun 12 Jun 13 Jun 14

bps

Change in main refinancing rate (relative to June 2012)

20th and 80th percentiles range of lending rate changes

Impaired pass-through to lending rates

Source: ECB calculations. Last observation: 15 October 2014. Notes: Lending rates refer to euro area monetary financial institutions' lending rates on loans of up to EUR 1 mn to non-financial corporations.

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Jan 10 Jan 11 Jan 12 Jan 13 Jan 14

% Annual HICP inflation 5-year/5-year inflation swap rate

Declines in both actual and expected euro area inflation

Source: Thomson Reuters, SDW, and ECB calculations. Last observation: 15 October 2014.

The APP: why was it needed?

4

Jun-

14

Sep-

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Dec

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Mar

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Mar

-16

Jun-

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Dec

-16

Mar

-17

Jun-

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Sep-

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Dec

-17

Mar

-18

Jun-

18

Sep-

18

Dec

-18

Mar

-19

Jun-

19

Sep-

19

Dec

-19

APP

TLTRO II

TLTRO III

Third Covered Bond Purchase Programme (CBPP3)

Asset-backed Securities Purchase Programme (ABSPP)

Public Sector Purchase Programme (PSPP)

Corporate Sector Purchase Programme (CSPP)

Reinvestment Phase

The APP: how did it happen?

The APP in context - an abridged timeline of non-standard measures

Source: ECB .

Negative deposit facility rate

TLTRO I

5

The APP: which asset classes?

6

PSPP ABSPP CBPP3 CSPP

Eligible Universe

Mon. pol. eligible government, agency and EU supra bonds

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

Mon. pol. eligible CBs

Non-financial and financial corporate securities (excluding unsecured bank bonds)

Min. rating CQS3

Maturity 1 — 30 years All 6 months — 30 years

Purchases Secondary market

Primary & Secondary Market

Implementation NCBs and ECB 6 NCBs NCBs and ECB 6 NCBs

Income/Loss Share

20% Yes

0

10

20

30

40

50

60

70

80

90

Mar

Jun

Sep

Dec Mar

Jun

Sep

Dec Mar

Jun

Sep

Dec Mar

Jun

Sep

Dec

2015 2016 2017 2018

EURbn PSPP CSPP CBPP3 ABSPP Average

How much APP?

4 recalibrations of APP net purchases from 2015 to 2018

Source: ECB Last observation: 31 December 2018.

7

How much APP?

APP cumulative net purchases by programme

0

400

800

1200

1600

2000

2400

2800

2015 2016 2017 2018 2019

EURbn

PSPP CBPP3 CSPP ABSPP

Net purchase phase

Reinvestment phase

Source: ECB Last observation: 31 May 2019.

8

What was the impact of the APP?

Significant decline in sovereign and corporate bond yields in the euro area

Source: Markit iBoxx, Bloomberg, and ECB calculations. Last observation: 5 June 2019. * Euro area sovereign yield calculated as average yield of Germany, Italy, Spain and France.

9

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016 Jan 2017 Jan 2018 Jan 2019

% Euro area sovereign yield (average)* Yield, euro area investment grade non-financial corporates

What was the impact of the APP?

Source: Based on Eser, Lemke, Nyholm, Radde and Vladu (2019). Notes: The left panel shows by how much the term premium component of sovereign euro area yields with maturities of one year to ten years are estimated to be compressed due to the APP, at the time of the launch of the APP (Q1 2015), as well as at the end of the net purchase phase in December 2018. The right panel shows point estimates of the ten-year yield term premia compression over time. The confidence band reflects parameter uncertainty around these point estimates, constructed using bootstrap/Monte Carlo resampling techniques. Euro area yields are proxied by the GDP-weighted zero-coupon yields of the four largest euro area jurisdictions.

Significant decline in estimated term premium on euro area sovereign yields

10

0100200300400500600700800900

1000

Jun-

16

Sep-

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Dec

-16

Mar

-17

Jun-

17

Sep-

17

Dec

-17

Mar

-18

Jun-

18

Sep-

18

Dec

-18

Mar

-19

EURbn Held CSPP eligible universe

Non-held CSPP eligible universe

Start Reinvestment Phase

Evolution of CSPP-eligible universe and holdings

CSPP Impact

• Positive impact via direct pass-through, with positive spill overs to non-eligible fixed income securities

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

Source: iBoxx. Last observation: 31 May 2019.

11

Source: iBoxx. Last observation: 31 May 2019.

0

50

100

150

200

250

300

0

100

200

300

400

500

600

Jan-

16A

pr-1

6Ju

l-16

Oct

-16

Jan-

17A

pr-1

7Ju

l-17

Oct

-17

Jan-

18A

pr-1

8Ju

l-18

Oct

-18

Jan-

19A

pr-1

9

Start purchases CSPP

iBoxx EUR HY iBoxx EUR Non-Financials (rhs)


bps bps Announcement CSPP

0

50

100

150

200

250

300

Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19

bps ESᵉ IE ITᵉ NL PTᵉ


CBPP3 and ABSPP impact

Source: iBoxx indices. Last observation: 31 May 2019.

Covered bond asset swap spreads, per selected jurisdiction

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

Source: JPM Indices. Note: WAL at issuance 5-7 years, AAA rated (ECB coll. Eligible labelled e). Most spreads over 3-month Euribor Last observation 31 May 2019.

12

-20

0

20

40

60

80

100

120

Aug-14 Aug-15 Aug-16 Aug-17 Aug-18

bps DE ES IT FR

Start purchases CBPP3

Announcement CBPP3


Impact on lending rates

13

Start CBPP3 and ABSPP

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Jan2007

Jan2008

Jan2009

Jan2010

Jan2011

Jan2012

Jan2013

Jan2014

Jan2015

Jan2016

Jan2017

Jan2018

Jan2019

%

Broad-based decline in bank lending rates to companies

Source: ECB calculations. Last observation: 30 April 2019. Notes: The indicator for the total cost of lending refers to non-financial corporations and is calculated by aggregating short and long-term rates using a 24-month moving average of new business volumes. The cross-country dispersion displays the min and max range over a fixed sample

Germany Spain France Italy Euro area Cross-country dispersion


Impact on loan growth

-20

-10

0

10

20

30

40

Jan2007

Jan2008

Jan2009

Jan2010

Jan2011

Jan2012

Jan2013

Jan2014

Jan2015

Jan2016

Jan2017

Jan2018

Jan2019

Country dispersion DE ES FR IT NL EA

Loan growth to companies gradually strengthening

Source: ECB calculations. Last observation: 30 April 2019 Notes: Adjusted for sales, securitisation and cash pooling activities. The country dispersion is calculated as min/max over a fixed sample of 12 euro area countries.

14


Now: reinvestment of APP stock and forward guidance

Expected redemptions until May 2020

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

May

-19

Jun-

19

Jul-1

9

Aug

-19

Sep-

19

Oct

-19

Nov

-19

Dec

-19

Jan-

20

Feb-

20

Mar

-20

Apr

-20

May

-20

PSPP CBPP3 CSPP ABSPP Average

Source: ECB. Last observation: 31 May 2019.

• The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

• Cumulative net purchases under each constituent programme will be maintained at their respective levels as at the end of December 2018

15

1 APP Overview

Overview



4 Conclusion

16

Operational implementation reflects the specificity of the euro area

CB Jurisdictions Assets purchased Purchase methods

BoE UK • Government bonds • Corporate bonds

• Reverse auctions

Fed US • Treasury securities • Agency mortgage-backed securities • Agency debt securities


BOJ JP • Short-term government bonds • Long-term government bonds • Corporate bonds • Commercial paper • Real estate investment trusts • Equity ETFs (exchange traded funds)


Eurosystem (20 central banks)

AT, BE, CY, DE, EE, ES, FI, FR, GR, IE, IT, LT, LU, LV, MT, NL, PT, SI, SK

• Central government bonds • Agency bonds • Regional and local government

bonds • EU supranational bonds • Corporate bonds • Asset-backed securities • Covered bonds

• Bilateral: Electronic platforms and voice

• Reverse auctions: PSPP: BdF, DNB, Lietuvos Bankas, Bundesbank

• Bids wanted in competition: ABSPP

17

Key operational goals

Provide necessary monetary accommodation

Ensure market neutrality in APP implementation, in particular: - preserve the price discovery mechanism - limit distortions in market liquidity

1

2

7 asset classes, 19 individual jurisdictions, by 20 Central Banks

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-250

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1000

1250

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2000

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0.7

1.4

2.1

2.8

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4.9

5.6

07 08 09 10 11 12 13 14 15 16 17 18 19

EUR bn % Excess Liquidity (LHS) EONIA Deposit rate Marginal lending rate MRO rate

Provide necessary monetary accommodation

1

Source: ECB. Last observation: 03 May 2019.

19

(RHS)

A balancing act: to impact prices, but not relative pricing and price discovery

2

• Monthly totals: not daily

• Adjusting for: ˗ Seasonal liquidity ˗ Local conditions ˗ Local conventions ˗ Market moving events ˗ CTD contracts

• 350+ counterparties

• PSPP acted as a buffer to ensure fulfilment of overall monthly purchase targets

• Securities lending

Rule-based approach… …with some flexibility

• Ex ante communication on the operational parameters

• Clear and observable monthly APP targets

• Regular purchases

• Market benchmark (private programmes)

• ECB capital key (PSPP)

20

Regular disclosure on APP purchases and holdings

PSPP: Preserve the price discovery mechanism

Spreads versus 10-year German government bonds since the beginning of PSPP

Source: ECB calculations. Last observation: 5 June 2019. Note: 10-year euro area government bond spreads against Germany. All selected bonds are benchmark.

21

2

PSPP: Limit distortions in market liquidity

Liquidity indicators suggest orderly market conditions

Source: Bloomberg, EuroMTS Ltd and ECB calculations Notes: An increase (decrease) in the indicators implies a deterioration (improvement) in the liquidity situation. The chart shows the five-day moving average of the indicators. The order book indicator is a euro area-wide GDP-weighted average of ten-year sovereign bonds and the execution-based indicator is a volume-weighted average for sovereign bonds traded under the PSPP. They are normalised to 100 on 9 March 2015, when purchases under the PSPP began. Last observation: 21 December 2018. Values above 600 are scaled down by a factor of 4.

22

2

0%10%20%30%40%50%60%70%80%90%

100%

Jul-1

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ct-1

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Apr

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Apr

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7O

ct-1

7Ja

n-18

Apr

-18

Jul-1

8O

ct-1

8Ja

n-19

Apr

-19

Share of special trades

Start cash collateral


0

10

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80

Jul-1

5O

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Apr

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Loans against securities collateralLoans against cash collateral


Lending against cash collateral facilitates bond and repo market functioning

Source: ECB Note: Amounts are in market value terms Last observation: 31 April 2019.

APP Securities lent out by type of collateral Repo market developments for German government bonds

23

Start cash collateral

Source: ECB calculations, NEX Data and MTS Markets. Last observation: 31 April 2019. Note: Special trades are defined as those trades priced at least 25 basis points lower than the cheapest specific German bond on a given day. They are expressed as a share of the total volume on any given day.

EURbn

-5,000

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

2014 2015 2016 2017 2018

EUR mn CBPP3 SM CBPP3 PM CSPP SMCSPP PM ABSPP SM ABSPP PM

Private sector programmes: Preserve market liquidity

• During the net purchase phase, purchases under the private sector programmes were conducted alongside other market participants in both the primary and secondary markets.

• The shares varied over time as a reflection of issuance patterns and secondary market liquidity.

Purchases broken down by primary and secondary market (EUR m) for the net purchase phase

Source: ECB. Last observation: 31 December 2018. Notes: Purchases approximated from change in holdings. Negative values for a subcategory indicate that redemptions were greater than gross purchases for that period.

24

2

0%

5%

10%

15%

20%

25%

30%

35%

< 20

09

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

CSPP-eligible bond universe CSPP holdings

CSPP: Reactive to liquidity conditions to ensure market neutrality

Source: ECB. Note: CSPP holdings as of end of Q1 2019. 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.

Country and rating classification of CSPP holdings and CSPP-eligible bond universe

CSPP holdings according to the year of issuance of the bonds

• Purchases guided by market capitalisation • To guarantee smooth implementation, there is continuous communication on market conditions

Source: ECB, Bloomberg. Distribution based on nominal amounts. Last observation: 31 May 2019.

25

2

year of issuance

CBPP3: Enhanced transparency and market neutrality

Source: ECB. Note: CBPP3 holdings and benchmark as of end of Q1 2019. The numbers may not sum to 100% due to rounding. Distribution based on nominal amounts.

Country and rating classification of CBPP3 holdings and CBPP3-eligible benchmark

• Transparency has played a central role in the APP

• Regular disclosure of information on APP purchases and holdings was recently complemented by additional information on CBPP3 and ABSPP

• CBPP3 purchases were broadly oriented towards a market capitalisation-based benchmark

• CBPP3 benchmark weights attached to certain covered bond categories decreased over time

• CBPP3 benchmark updated regularly so as to guide future purchases

26

2

ABSPP: Enhanced transparency and market neutrality

Source: ECB. Note: ABSPP holdings and universe as of end of Q1 2019. The numbers may not sum to 100% due to rounding. Distribution based on nominal amounts.

Country and rating classification of ABSPP holdings and ABSPP-eligible benchmark

27

• ABSPP portfolio composition reflects market capitalisation and market liquidity.

• Gross ABSPP purchases were more broadly distributed across jurisdictions than the holdings indicate, reflecting the prevalence of different asset types in each country.

2

1 APP Overview

Overview



4 Conclusion

28

PSPP represents more than 80% of total APP holdings

Last observation: 31 May 2019

1%

10%

7%

82%

APP holdings breakdown (%)

ABSPP CBPP3 CSPP PSPP

Holdings at amortised cost (EUR billion)*

ABSPP

26

CBPP3

262

CSPP

178

PSPP

2,093

Total APP

2,559

29

PSPP: technical parameters for reinvestment phase

30

• The allocation across eligible jurisdictions will continue to be guided by the ECB’s capital key, now taking the appropriate stock perspective.

• Any adjustment to the portfolio allocation across jurisdictions will be gradual.

• The principle of market neutrality via smooth and flexible implementation continues.

• Reinvestment of principal redemptions will be distributed over the year to allow for a regular and balanced market presence.

Reinvestments will continue to absorb a significant share of issuance

31

Gross PSPP purchases as a share of planned gross issuance

0

5

10

15

20

25

30

35

40

DE ES FR IT

2018 2019 2020

Source: ECB Note: refers to central government only.

%

Private sector programmes: Technical parameters for reinvestment phase

32

Aim to maintain the size of its cumulative net purchases under each constituent programme of the APP at their respective levels as at the end of December 2018

Limited temporary deviations in the overall size and composition of the APP may occur for operational reasons

Market capitalisation will continue to be the guiding principle for reinvestment purchases

Will the Eurosystem continue to buy in the primary market in the reinvestment phase? Clarified in the Q&As of the individual programmes.

- CSPP primary market participation is permitted but not currently foreseen - CBPP3 purchases of securities in the primary market continues to be permitted

as necessary - ABSPP remains active in both the primary and secondary ABS markets during

the reinvestment phase

Private sector programmes: CSPP transition to the reinvestment phase

Evolution of the average CSPP trade size New Issuance Premium (NIP) (bps; 30 deal moving average weighted by issue size)

0

5

10

15

20

25

30

35

Jun-

16

Sep-

16

Dec

-16

Mar

-17

Jun-

17

Sep-

17

Dec

-17

Mar

-18

Jun-

18

Sep-

18

Dec

-18

Mar

-19

30 deal average

Source: Eurosystem, Bloomberg. Note: New Issuance Premium for CSPP eligible issuances. Latest observation: 21 May 2019.

• Reduced CSPP presence in 2019 does not seem to have major impact in corporate bond market

33


5060708090

100110120130140150

Jun-

16

Sep-

16

Dec

-16

Mar

-17

Jun-

17

Sep-

17

Dec

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Mar

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Jun-

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Dec

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Mar

-19

Index average ticket size


Source: ECB. Note: Index: June 2016 = 100. Last observation: 31 May 2019.

0%

20%

40%

60%

80%

100%

2013 2014 2015 2016 2017 2018 2019

Other Insurance funds & pension fundsAsset Managers BanksCentral Banks & Official Inst.

0

1

2

3

4

5

6

7

8

Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19

30 Deal Average

Private sector programmes: CBPP3 transition to the reinvestment phase

Source: ECB calculations. Note: Figures are for EUR benchmarks so they include non-eligible deals. Central banks include sovereign/official institutions. Last observation: 31 May 2019.

Covered Bond Primary Market Breakdown (%; breakdown of primary market deals by investor type)

Source: Eurosystem, Bloomberg. Note: New Issuance Premium for CBPP3 eligible issuances. Last observation: 31 May 2019.

• The drop in central bank allocations in primary markets in 2019 has not left a void. Banks took up a larger share of supply in the primary market, keeping NIP low and relatively stable.

New Issuance Premium (NIP) (bps; 30 deal moving average weighted by issue size)

34


1 APP Overview

Overview



4 Conclusion

35

Conclusion

36

• APP size and pace adequate to achieve monetary policy accommodation…

…while preserving the price discovery mechanism and market liquidity;

• Operational flexibility allows adjustment to local market specificities, supporting a market neutral implementation;

• Monetary policy accommodation continues in the reinvestment phase, with the same implementation objectives.

Thank you

for your attention!

37

Documents

Kieran Leonard including reinvestment · 2019-07-17 · Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18