Recall last month’s “holy Schatz!” drama.
The front end of the German curve richened materially on a combination of i) ECB buying below the depo rate, and ii) a safe haven bid attributable to French election risk.
This created all manner of aberrations and distortions, including but (probably) not limited to, i) iTraxx Main trading inside 2Y swap spreads, ii) an explosion in negative spread corporates, which was ironically catalyzed by CSPP.
There was quite a bit of debate about the extent to which the plunge in Schatz yields was attributable to French election risk. That sounds esoteric, but it’s pretty important. That is, if it was more front-end QE than it was flight to safety, then we can’t really read much into it in terms of using it as a barometer for political uncertainty.
Well, it looks like that debate has been settled. Or at least the following chart seems to suggest it has…
Today’s monthly ECB QE data implies a substantial drop in the Weighted Average Maturity (WAM) of monthly German bond purchases, from an estimated 9.4y in January to a record low 4.3y in February (Chart 8). This is derived from the decline in the remaining WAM of the German QE portfolio (to 7.88y, from 8.15y at the end of January). The 4.3y figure is right in line with the level we had envisaged when assuming that Bundesbank govie purchases would be split across the curve (1-31y) in proportion of remaining eligible amounts (see scenarios analysis in EU rates). More importantly, consensus was probably looking for a much higher WAM even as purchases below the Depo started. Our Feb FX and Rates Sentiment Survey showed that 80% of investors believed German purchases will continue to average over 5y in maturity, with 40% even thinking purchases could stay above 8y. This low duration of purchases thus supports the steepening bias we have been expressing on the back of changes in CB buying.
As the German front-end was rallying substantially in Feb, we argued that the move could be due to the market being caught off-guard by a possible large QE bid in the front-end; the higher than expected weighted average maturity (WAM) of German QE purchases in January may have led to expectations that the ECB would resist buying much in the short-end.
We think today’s release comforts our finding that the larger-than-expected German QE buying in the sub 5y sector and non-EUR CB interventions (eg SNB, CNB, Danish CB) were likely responsible for over 50% of the richening in Schatz & Bobl vs OIS in Feb.