Since the European Central Bank launched its first quantitative easing program in 2015, a common topic among fund managers and in rating agency reports has been the risk of the European bond market becoming Japanese; it’s the prospect of one of the world’s largest bond markets steadily shrinking, with investors increasingly having call options and profit opportunities because of the main buyer, the ECB.
Ioannis Sokos, Director of Fixed Income Research at Deutsche Bank, says: “My response to all of these concerns has always been the same: what if the ECB was not the dominant buyer of the European government bond market? In the absence of QE from the ECB, I think the risk of the euro zone breaking up would have been much greater than it was in the aftermath of the European debt crisis. Therefore, while this is a fair and accurate review as liquidity is indeed diminished, the pros and cons of the ECB’s QE have to be weighed, and I personally think the pros clearly outweigh the cons.
Speaking to Kathimerini, he added that “Investor foreclosure is part of the mandate of any QE, central banks like to call this model the portfolio rebalancing effect. This surely has side effects, not only in terms of erosion of liquidity and “price discovery” in the sovereign bond market, but also in terms of the profitability of the banking system, ”he notes.
“Let me say that 2020 could have been an exception, because perhaps for the first time since the launch of the ECB’s QE, the ECB’s asset purchases have coincided with a substantial fiscal stimulus in countries that led to a record supply of sovereign bonds and treasury bills. “
Nicola Mai, portfolio manager and sovereign credit analyst at Pimco, tells Kathimerini he is not concerned that the ECB is crowding out investors in Europe. “On the contrary, the stabilization function of its asset purchase program should attract investors.
“In addition, the less supply of bonds available in the market after the ECB purchases and the fact that investors must have duration in their portfolios means that European bonds should remain in demand,” he adds. .
The asset manager of a large French bank agrees that the purchase of bonds by the ECB has not deterred investors from investing in bonds. “If you look back to 2020 and the Sovereign and the ASS [sovereigns, supranationals and agencies] issues, we have seen record volumes with low premium issues.
He adds “without a doubt the ECB maintains control of the yield curve in Europe. What does this mean though, it removes tail risk and reduces EGB default risk as long as 40% of debt is with the ECB and national central banks. This then brings many investors back to the party. “