The Eurosystem s asset purchase programme

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1 Katja Hettler Lia Cruz Monika Znidar Euro Area Bond Markets Section DG-Market Operations The Eurosystem s asset purchase programme ECB Central Banking Seminar Frankfurt, 13 July 2018

2 Rubric The Eurosystem s asset purchase programme Overview Introduction Public sector purchase programme (PSPP) Private sector purchase programmes (CBPP3, CSPP, ABSPP) Securities lending 5 Conclusion and next steps 2

3 Rubric The Eurosystem s asset purchase programmes Overview Introduction Public sector purchase programme (PSPP) Private sector purchase programmes (CBPP3, CSPP, ABSPP) Securities lending 5 Conclusion and next steps 3

4 Rubric The APP a bird s eye view The expanded asset purchase programme (APP): 4 programmes introduced in Timeline of non-standard measures Source: ECB. 4

5 Rubric The different components of the APP PSPP represents more than 80% of total APP holdings At amortized costs, in euro billion (31 May 2018) PSPP 1,992.9 CBPP CSPP ABSPP 27.4 Total APP 2,431.4 Source: ECB. Last observation: 31 May

6 The Rubric different components of the APP Net APP purchases have been calibrated over time Monthly change in holdings (at amortised cost) Source: ECB. Latest observation: 31 May

7 Rubric The different components of the APP and the reinvestments of redemptions also play a relevant role Realised and expected APP redemptions (rolling 12 month period) Source: ECB. Latest observation: 31 May

8 Rubric The Eurosystem s asset purchase programme Overview Introduction Public sector purchase programme (PSPP) Private sector purchase programmes (CBPP3, CSPP, ABSPP) Securities lending 5 Conclusion and next steps 8

9 Rubric PSPP design and modalities (I) PSPP covers a broad range of government linked entities PSPP 90% 10% Euro-area sovereign / Agencies EU institutions (supranational & institutional) 10% 80% ECB NCB NCB Loss-sharing Non loss-sharing % Proportion of purchases

10 Rubric PSPP design and modalities (II) NCB purchases are determined by the ECB capital key, with some flexibility Substitute purchases for NCBs are possible to reach capital key Purchases also at negative yields, below the deposit facility rate only to the extent necessary The implementation of the PSPP aims ex ante at market neutrality in the sense of avoiding dislocations in euro area government bond curves within the minimum maturity of 1 year and a maximum maturity of less than 31 years. Blackout period to avoid direct influence on primary market price formation and also important with respect to monetary financing prohibition Issue/issuer limits to avoid blocking minority for CACs and to avoid becoming overly dominant player in sovereign bond market 10

11 Rubric PSPP - implementation Insights into the implementation Purchases are coordinated within the Eurosystem on a daily basis via chat and teleconference at Portfolio Manager level Selection of bonds is based on Pricing / spread analysis Limit restrictions Feasibility considerations Scarcity in the market Counterparties inventories and positions Trades are conducted with a wide set of counterparties Purchases are done bilaterally or via reverse auctions Most purchases in government bonds are done electronically 11

12 Rubric Euro area bond market developments (I) 10-year euro area government bond yields at record low levels VLTRO announcement Draghi s London Speech ABSPP & CBPP3 announcement PSPP announcement Source: Bloomberg, ECB Staff calculations. Last observation: 31 May

stabilised and returned quickly to previous levels 2-year Spanish-German sovereign yield spread broadly stable,

13 Rubric Euro area bond market developments (II) Political risks in Europe with (temporary) market impact 2-year French-German sovereign yield spreads increased around French presidential elections in Apr-May 2017, but stabilised and returned quickly to previous levels 2-year Spanish-German sovereign yield spread broadly stable, despite political developments in Catalonia in Oct 2017 Source: Bloomberg, ECB Staff calculations. Last observation: 31 May

14 Rubric Euro area bond market developments (III) Italian political developments with significant impact on Italian sovereign debt market % Bond yields 10-year IT 10-year DE bps IT-DE yield spread Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18. Source: Bloomberg. Last observation: 04 June

15 Rubric The Eurosystem s asset purchase programme Overview Introduction Public sector purchase programme (PSPP) Private sector purchase programmes (CBPP3, CSPP, ABSPP) Securities lending 5 Conclusion and next steps 15

16 Private Rubricsector parts of the APP: objectives & transparency ABSPP CBPP3 CSPP Objectives / motivation provide credit to the real economy; help lenders diversify funding sources Contribute to the revitalisation of a more sustainable securitisation in the euro area facilitate credit provision by banks to the real economy support financing conditions in the euro area strengthen the pass-through of the Eurosystem s APP to financing conditions of the real economy; provide further monetary policy accommodation Eligible Universe Mon. pol. eligible ABS (subject to Due Diligence assessment) Mon. pol. eligible CBs for own use & multi-cédulas Non-financial and financial corporate securities (excluding unsecured bank bonds) Minimum rating CQS3 CQS3 CQS3 Maturity All All 6 months 30 years Issue Limit 70%* 70%* / ** 33%/70%* / ** Issuer limit No Yes** Yes* Purchases 1 ary & 2 ary market 1 ary & 2 ary market 1 ary & 2 ary market (no 1 ary for public sector) Implementation 6 NCBs NCBs and ECB 6 NCBs Income/Loss Sharing Yes Yes Yes 16 * Specific conditions for programme countries apply ** Combined Eurosystem holdings from monetary policy and investment portfolios

17 Rubric Private sector parts of the APP: Review Since the start of the programmes, several positive developments are to highlight: 1. Broad based spread tightening. Covered bond asset swap spreads, per selected jurisdiction bps 160 CBPP3 Announceme nt CBPP3 Start DE ES IT FR Spreads of AAA-rated* floating rate RMBS with 5-7 years maturity (bps) bps ABSPP 300 announcement ABSPP start IT NL ES-ECB elig. PT-ECB elig. ES IE IT-ECB elig Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Sources and notes: iboxx indices. Last observation: 31 May Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Source: J.P. Morgan. Notes: (*) rating at issuance. Most spreads are over 3- month Euribor. Last observation 31 May 2018.

18 Rubric Private sector parts of the APP: Review with positive spill overs to non-eligible fixed income securities Corporate bond spreads in EUR denominated investment grade vs high yield sector Sources and notes: ICE BAML EUR corporate bond index, ECB calculations. Last observation: 31 May

19 Rubric Private sector parts of the APP: Review 2. Issuance remained healthy or even picked up Covered bond issuance volumes Asset-backed securities issuance volumes EUR bn AT, BE, DE, FI, FR, NL ES, IE, IT, PT (YTD) Source: Dealogic, ECB calculations. EUR-denominated benchmark size primary market issuances. Last observation: 31 May Source: JP Morgan and ECB calculation. Last observation: 31 May 2018.

20 Rubric Private sector parts of the APP: Review however it is not yet evident that new or infrequent issuers have become more active Corporate bond issuance volumes Bond issuance by infrequent euro area nonfinancial corporate bond issuers EUR bn 250 EUR bn CSPP started in Jun CSPP started in Jun (YTD) (YTD) Source: Dealogic, ECB calculations. EUR-denominated benchmark size primary market issuances. Last observation: 31 May Sources: Dealogic, ECB calculations. EUR-denominated primary market issuances. Issuer is considered infrequent if they have no issuance over the previous 5 years. Last observation: 31 May 2018.

21 Rubric Experience of the private sector parts of the APP: e.g. of the CSPP CSPP at work: Eurosystem has bought >1,000 bonds, from all sectors and a variety of countries Split per country, sector and rating is generally in line with market capitalisation Sources: ECB, Bloomberg. Note: CSPP holdings as of end of Q CSPP holdings with a remaining maturity below 6 months are excluded. The numbers may not sum to 100% due to rounding. The eligible CSPP bond universe contains all bonds that are currently eligible for the CSPP. ECB coordinates purchases, executed by 6 NCBs, specialists in their jurisdictions To guarantee smooth implementation, there is continuous communication on market conditions, participation in primary market and of secondary market purchases

22 Rubric Experience of the private sector parts of the APP: e.g. of the CSPP calibration considers market functioning and liquidity impact to ensure market neutrality (1) CSPP purchases vary month by month, including split between primary and secondary markets (2) CSPP holds more of recently issued bonds (holdings per year of issuance) EUR bn Primary market purchases Secondary market purchases 10 35% CSPP-eligible bond universe CSPP holdings % 7 25% % 4 15% % 1 5% 0 Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May % < Source: ECB. Last observation: 31 May Source: ECB, Bloomberg. Distribution based on nominal amounts. Last observation 31 May 2018.

23 Rubric Experience of the private sector parts of the APP: e.g. of the CSPP flexibility is the key (3) Evolution of the average CSPP trade size suggests that liquidity conditions have remained adequate Index 140 average trade size (4) Contribution of private sector programmes overtime illustrates flexibility in implementation EURbn 90 Total APP % of private sector purchases (rhs) 45% % % % % 20% % % % % Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Source: ECB. Note: Index: June 2016 = 100. Last observation: 31 May Source: ECB. Last observation: 31 May

24 Rubric The Eurosystem s asset purchase programme Overview Introduction Public sector purchase programme (PSPP) Private sector purchase programmes (CBPP3, CSPP, ABSPP) Securities lending 5 Conclusion and next steps 24

25 Rubric APP securities lending Flexible set-up of the Eurosystem facilities Aim: To support bond and repo market liquidity without unduly curtailing normal repo market activity Common principles and pricing rules Decentralised implementation Balance between harmonisation and adjustments to local markets Primarily targeting market makers Strategic and fails lending facilities Monitoring the markets and the usage of facilities To ensure the ongoing effectiveness Changes in parameters introduced when deemed appropriate 25

26 Rubric APP securities lending Parameters of the ECB securities lending have been adjusted over the years Date Decision / Event Description Apr 2016 Nov 2016 Dec 2016 Dec 2016 May 2017 Mar 2018 Significant amendments of parameters More flexibility in timelines for borrowing Introduction of PSPP SL versus cash Pricing of lending versus security collateral Introduction of term repo up to 2 weeks and change in cut-off time Increase in cash collateral limit Move to open repo More favourable pricing schedule and lower fails fee Settlement possible at T, T+1 and T+2 (used to be only T+1) 7 Eurosystem members (including the ECB) started accepting cash collateral (currently 9), overall limit of EUR 50bn Minimum spread lowered from 30 bps to 10 bps In addition to open repo, borrowing on term repo basis introduced (up to 2 weeks) and longer cutoff time for returning bonds Limit on cash collateral received versus PSPP securities lending up from EUR 50 bn to EUR 75 bn. Note: The marked changes were applied to the entire Eurosystem. 26

27 Rubric APP securities lending Eurosystem PSPP on-loan balance rather stable this year, lending vs cash declining recently Average balances over the month in euro billion Source: ECB. Latest observation: 31 May Note: Includes average on-loan balance of SMP holdings. 27

28 Rubric APP securities lending Secured market functioning has improved recently Repo rates in selected jurisdictions % Italy Germany France Spain Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Source: BrokerTec. Latest observation: 31 May

29 Rubric The Eurosystem s asset purchase programme Overview Introduction Public sector purchase programme (PSPP) Private sector purchase programmes (CBPP3, CSPP, ABSPP) Securities lending 5 Conclusion and next steps 29

30 Rubric Conclusions and next steps The APP, alongside other measures, has been instrumental in providing an adequate degree of monetary policy accommodation; The operational set up of the several components of the APP is sufficiently flexible to allow for market neutrality; More responsive APP securities lending has led to increased lending volumes, coinciding with diminishing repo-market tensions; Monthly pace of the net asset purchases is now 30 billion per month, and it is anticipated that, subject to incoming data confirming the Governing Council s medium-term inflation outlook, it will be reduced from October to December 2018 to 15 billion; Positive net purchases will then end but reinvestments of principal payments will continue for an extended period of time and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation. 30

Recent developments in the euro money market. Money Market Contact Group Frankfurt, 18 September 2012

Recent developments in the euro money market Money Market Contact Group Frankfurt, 18 September 2012 ECB developments and announcements I 5 July 2012 The ECB reduced by 25 basis points the interest rate