Ever since the European Central Bank launched its expanded asset-purchase program in early 2015 to support the euro-zone’s economy, it has received copious amounts of criticism — not least from Germany. It even faced a lawsuit over this policy. Detractors have accused the ECB of distorting the markets, of overstepping its powers, or of robbing savers due to stubbornly low interest rates.
But in fact, investors have had little reason to complain. The prices of bonds and equities have soared in recent years – in part thanks to the ECB’s quantitative-easing policy. Since the launch of the QE program, the euro-zone’s monetary authority has purchased sovereign bonds worth just under €2.6 trillion, or $3 trillion (see graphic below). Its monthly purchases peaked at €80 billion for a year through March 2017, and were subsequently reduced three times. Since October, the ECB has been buying “just” €15 billion a month.
And now the ECB is about to stop buying assets altogether. The QE program will end in December, central bank boss Mario Draghi announced last summer. And this will have consequences. Here’s an overview of how this will affect the markets for a selection of assets.
The ECB indirectly supported the stock markets with its asset-purchase program. "Companies were able to refinance even more cheaply, which increased margins and lowered default risks," said Marc Hellingrath, global equity chief at Union Investment. From the beginning of bond purchases until mid-January this year, Germany’s DAX 30 blue-chip index gained 14 percent – not as much as investors had hoped, but still a reasonable gain. Since then the rally on Europe's stock exchanges has ground to a halt.
However, the fact that the ECB halved its monthly bond purchases to €30 billion last January has little to do with this. "Above all, American investors have withdrawn their money from Europe because the prospects in the US are better,” Mr. Hellingrath explained.
The end of ECB purchases on the bond market is also unlikely to impact stock markets, as corporate interest rates are set to remain comparatively low. The key factor is the evolution of corporate profits, according to Mr. Hellingrath. And the prospects aren’t so bad since the economy is still doing quite well.
The ECB holds over €2.1 trillion worth in government bonds. Thanks to the central bank’s sustained demand for debt, bond prices have risen significantly, while yields – the annual return on bond investments – have fallen.
When Mr. Draghi first hinted in August 2014 that the ECB might start buying debt on a large scale, the yield on 10-year German bonds (also known as Bunds) was 1 percent. After the Brexit vote in the summer of 2016, this yield fell to minus 0.2 percent. But in the past two years, as speculation about the end of the bond purchase program mounted, the return has oscillated around 0.5 percent. “The markets have already anticipated a lot,” said René Albrecht, an interest-rate strategist at DZ Bank. However, he views a significant increase in yields as unlikely, because the ECB has tightened the supply with its purchases.
The picture is different for Italian bonds. Their yield has shot up as Rome locked horns with the EU over Italy’s budget deficit in recent weeks. At 3.4 percent, the yield on 10-year Italian bonds is at a five-year high. Fearful of dire consequences from an end to the ECB’s asset-buying program, the populist government in Rome asked the central bank in August to extend it.
The abbreviation CSPP, short for corporate sector purchase program, is one of the most controversial parts of the ECB's QE policy. In mid-2016, the central bank started buying company bonds with good credit ratings. This caused prices to rise and returns to plummet for investment-grade bonds.
But in recent months, the ECB has scaled back its purchases of corporate bonds, and this has pushed yields back up. Commerzbank analyst Marco Stoeckle said he expects a moderate rise in corporate bond yields over the next three to six months.
With a volume of around €258 billion, mortgage-backed bonds are the second-biggest item in the ECB's purchase portfolio. And since the market for these mortgage-backed securities, known as Pfandbriefe in German, is relatively small compared to the sovereign-bond market, market distortions are particularly visible. Among other effects, the ECB’s purchases drove many commercial customers out of the market.
However, the ECB is currently acting as a buyer only of new issues – and in smaller volumes. The market feels that already, and returns on mortgage-backed securities have risen, noted Uwe Pyde, head of bonds at asset manager Bantleon.
The so-called asset-backed securities (ABSs) have fallen into disrepute as a trigger for the global financial meltdown a decade ago. Despite the ECB's purchase program, this asset class has not yet recovered, and issue volume is not yet at pre-crisis level. Currently, the ECB still holds nearly €27 billion worth of securities. That’s just a fraction of the €1.2 trillion securitization market in Europe. DZ Bank analyst Ann-Kristin Moeglich expects the ABS market "should well cope with the ECB's withdrawal.”
Jakob Blume is a Handelsblatt correspondent based in Frankfurt. Andrea Cünnen works at Handelsblatt’s finance desk in Frankfurt, reporting on the bond markets. Jean-Michel Hauteville, an editor for Handelsblatt Global, adapted this article into English. To contact the authors: [email protected], [email protected]