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According to Jan von Gerich, Research Analyst at Nordea Markets, German bonds are set to dominate ECB buying next year, when the focus shifts from net bond purchases to reinvestments.

Key Quotes

“Italy should not expect much more help from ECB bond purchases, and the new capital key will hurt Italy further.”

“The ECB will scale down its monthly bond purchases from EUR 30bn to EUR 15bn at the end of September.”

“The next point of focus will be the ECB’s reinvestment programme, which will receive increasing focus, as net purchases cease. Close to EUR 200bn of bonds which the Eurosystem holds in its asset purchases programmes will mature in 2019 and will be reinvested. The reinvestment programme is thus quite sizable as well and will have significance for the bond markets.”

“Both the redemption outlook and the changed capital key will support the German bond market further in 2019 and should act as a buffer against higher yields. Given that Germany is currently running public surpluses and seeing its borrowing needs decline, it is among the last countries that would be in need of a buyer.”

“Italy, in turn, which is planning increased fiscal spending and with that rising bond issuance needs, will be the biggest relative loser in the ECB’s reinvestments. As a result, the country should not count on the ECB to keep its bond yields in check. More likely, pressure from the Italian bond market in the form of higher government bond yields will probably prevent the Italian government from implementing its most extreme policy plans in the end.”