Under the programme, the ECB has committed itself to buy €80bn in European government bonds each month, according to a distribution key based on GDP and outstanding government bond stock of each country in the euro area, up to a maximum of 33% per bond issue. However, the fact that the ECB cannot buy bonds in the secondary market that trade with a yield to maturity below the deposit rate of -0.4% complicates matters, notes Kommer van Trigt, manager of the Robeco Global Total Return Fund.
And since Brexit, core eurozone government bonds have rallied, resulting in an ever larger share of especially German and Dutch government no longer being eligible for the ECB to buy. “In practice this means that the minimum maturity that can be bought has moved from 5 to 8 years in Germany,” says van Trigt.
“This also has a second-round effect: with a decreasing pool of purchasable bonds more needs to be bought per bond to get to the required monthly target of €80bn. As a result, issue limits fill up much quicker,” he adds. “We think that the ECB will struggle to buy government bonds in both Germany and the Netherlands around year end, while the current purchase programs runs until March 2017 at least, and probably a lot longer.”
QE in a deadlock?
So this prompts the question how the ECB could possibly implement its QE programme. Fred Jeanmaire, a European equity fund manager at Columbia Threadneedle suggested last week at the Expert Investor Belgium Forum that the ECB could of course lower interest rate further. But he deemed this unlikely because of the negative side effects associated with negative rates, for example for banks and savers.
Another way out for the ECB is of course to buy more corporate bonds. This option was introduced by Draghi earlier this year, and the ECB started buying corporate bonds in June.
But Van Trigt believes it’s most likely that the ECB will continue on its path of continuously increasing its role as a market actor, by hiking the issue limit for government bonds from 33% to 50%. “We expect the ECB to announce this in September. Increasing the limit should be a fairly easy step, which should provide some additional breathing space,” he says.
The fund manager has positioned his portfolio accordingly. Though long-duration AAA-rated government bonds have significantly outperformed their short-duration peers this year, he expects the ECB’s policy to continue functioning as a curve flattener. At the end of May, the Robeco Global Total Return Bond Fund had an allocation of 69.7% to AAA-rated government bonds, with a strong overweight to long-duration German Bunds.