Ok, so let me just say at the outset that Citi thinks (or maybe “Citi says” is better) that the chart I’m about to show you doesn’t represent the ECB embarking on a concerted effort to support French govies ahead of the presidential election.
Citi’s rationale for that contention is simple:
That just isn’t how QE execution works.
I see.
And that’s weird, because here I thought that’s exactly how central bank intervention “works.” After all, if that’s not “how it works,” then what the fuck does “whatever it takes” even mean?
Good question, no?
To be sure, Citi has the technicalities of implementation to lean on there, so I’m deliberately oversimplifying in an effort to i) add some humor, and ii) make a point.
That said, have a look at this chart which shows that according to the most recent ECB QE data, Draghi was buying a whole hell of a lot less German debt than the capital key dictates and more French debt than the capital key dictates in April (buying above the capital key isn’t new for France, but as Citi notes, in April the buying “was further above the key than usual”):
Here’s the accompanying color from Citi:
Scarcity signals. The most striking aspect of the latest QE data, released earlier this week, was that German buying was below the capital key in April.
True, it was only €0.41bn below, but this is only the second time this has happened (Figure 1). The last time, in June 2016, was the result of deeply negative yields with German buying constrained by the depo rate rule. Scarcity is the most likely explanation this time. This is all the more surprising given this was a month in which target purchases were reduced by the taper from €80bn to €60bn. It is worth noting that the buying of France was further above the capital key than usual, but we doubt that this was motivated by a desire to support the market around the French elections. That just isn’t how QE execution works.
The reason this is a big deal is that German QE consistently runs above the capital key to help make up for the shortfall in constrained markets (like Portugal, Ireland and the Netherlands – Figure 2). If scarcity is now impacting QE implementation, Germany may now join the other constrained markets.
An alternative theory is that buying below the capital key for Germany is a tactic to extend the life of Bund purchases. Regardless, it highlights the implementation challenge facing the ECB.
