Operation Twist – With European Characteristics

So apparently, the ECB is going to conduct its own version of Operation Twist next year, in an effort to keep longer-term borrowing costs anchored even as APP comes to a close.

This is another one of those ECB trial balloons emanating from multiple “central bank sources”. They do this all the time and Reuters gets their fair share of the action.

“Conversations with five central bank sources show policymakers are wary of seeing long-term yields creep back up as the ECB’s stock of bonds ages, or loses duration,” Reuters reported on Friday, before getting to the extremely riveting details, which amount to the suggestion that the Governing Council is “considering buying more longer-dated bonds, generally seen as maturing in 10 years or more, with the cash it gets from maturing paper.”

Right. So Operation Twist – with European “characteristics” (there’s a geopolitics joke in there for those so inclined).

30Y German yields fell on the news and if you’re in steepeners in the German curve, I guess you’re just fucked here.


This comes conveniently as inflation in the euroarea ticks up to a super-“tremendous” 2% for the first time in more than a year:


“It’s certainly one way to hold down long-end yields and mitigate the duration-negative impact of the inflation pickup that we’ve seen from European CPI reports,” Bloomberg’s  Anchalee Worrachate wrote this morning, adding that “it’s also a likely boon for the region’s stocks as the central bank finds ways to stay accommodative despite the end of QE.”

Right. And I guess we should have seen this coming, considering Draghi seemed to go out of his way to be vague on reinvestment policy at the June meeting, perhaps because he was planning on doing something like this and wanted to send a few trial balloons up to see how the market would take it. For what it’s worth, here’s a bit of color from Goldman on the reinvestment schedule:

On our simulations, the total amount of bonds up for reinvestment is likely to be close to €120bn in 2018 and reach approximately €200bn per year by 2021. Cumulatively, about 15% of the terminal ECB stock of government bonds will need to be rolled over by the end of 2019 and around 40% over the next five years. According to our estimates, these redemptions will be marginally skewed towards Germany and France next year (these two countries alone make up around 50% of the total reinvestments in 2018 and 2019, just above their capital key share of 47%) and will broadly match the country share applied for net purchases over the coming years. This implies that, on average, the central bank will roll-over €15-25bn a month from 2019 onwards, as shown in Exhibit 2. These purchases will constitute the pace of monthly flows once the net purchases are terminated in December.


As Goldman writes later in the same note, “comparing simulated QE purchases to projected gross supply of government debt, we find that the bulk of the reduction in the ECB’s demand for duration risk has already come this year, and it will partly stabilise in 2019, despite the tapering”.


Anyway, you can draw your own conclusions here, but it’s risk-positive on balance, or at least it should be and suggests Draghi is keen on making the end of APP as dovish as absolutely possible.

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