Bond Shortage Is Draghi Running Out of Bonds?

The European Central Bank’s €1.1 trillion bond-buying program launched earlier this year is underpinning the continent’s economic recovery. But will the ECB be able to buy enough? Some analysts are getting worried.
Mr. Draghi needs money from wherever he can get it.

The European Central Bank has quite the appetite for bonds these days. Since launching a €1.1 trillion, or $1.3 billion, bond-buying program back in March, a program designed to kick-start the euro zone’s economy, the ECB has already bought about €360 billion in debt.

The ECB is buying just about everything it can get its hands on. The lion’s share comes from government bonds from each of the euro zone’s 19 members (even Greek bonds may soon be bought by the ECB). But the central bank is also buying up private debt from banks and companies.

Now it seems a smaller portion of the bond market has some analysts worried. To spread its risks, the ECB has determined that 12 percent of its purchases should come from supranational, government-run institutions and companies.

But are there really enough of these “supranational” bonds to go around?

Some analysts are already raising the question of whether the bonds of supranational institutions, like the European Investment Bank (EIB) and the European Financial Stability Facility (EFSF), a bail-out fund, are sufficient to satisfy the bond-buying appetite of ECB President Mario Draghi and his fellow monetary watchdogs.

Analysts from British bank Barclays have done the math – and it doesn’t look good.

The total volume of the market for the bonds of supranational institutions is €346 billion. The trouble is that the central bank has only about €87 billion of this at its disposal. That’s because another rule built into the program is that it can buy no more than a quarter of the outstanding volume per bond. Any more and the ECB would be potentially distorting what it wants to remain a private, bond-buying market.

Analysts from British bank Barclays have done the math – and it doesn’t look good.

From March to July, the ECB acquired more than €30 billion in bonds from the EIB and other supranational institutions. Based on this pace, Barclays concluded that the amount of outstanding securities will only be sufficient to last until the end of March 2016.

That poses a problem: The ECB intends to continue its bond-buying program until at least September 2016. According to Barclays, the new bonds that the supranational institutions are expected to issue between now and then will not be sufficient to fill the gap.

Analysts at Germany’s Commerzbank have arrived at similar conclusions. According to the estimates by Barclays and Commerzbank, the ECB is left with one of two options: It could either raise its purchasing limit of 25 percent per bond, or buy fewer bonds from the supranational institutions.

At an average of about €51 billion, the purchases of state-backed bonds constitute the lion's share of the monthly ECB bond purchases. The rest goes to covered bank bonds, such as German debentures, as well as asset-backed securities.

Investors like Felix Freund, fund manager with Standard Life Investments, believe the ECB does have the flexibility to adjust its program mid-stream. The ECB itself has also said it reserves the right to make changes to the pace and nature of its program between now and September.

Mr. Freund points to recent moves by the ECB that suggest it is aware of the shortage. For instance, the central bank just expanded its list of purchasable state-backed bonds to include the bonds of government-related infrastructure and transportation companies in July.

The monetary watchdogs are signaling "their willingness to expand the program should it fail to achieve its original goals, or if the debt crisis in Greece spreads to other countries in the euro zone," Mr. Freund said.

In other words, the ECB could even increase its appetite for bonds in future.


Andrea Cünnen covers the bond markets for Handelsblatt in Frankfurt. To contact the author: [email protected]