Marketing Communication
Group Economics
Euro Rates Weekly
Macro & Financial Markets Research Kim Liu +31 20 343 4669 kim.liu@nl.abnamro.com
Front and backloading matters
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22 May 2015
The ECB announced it will frontload and possibly backload purchases to counteract seasonal patterns This marks a shift as the ECB is now willing to adjust the pace of its purchases to market conditions The tweaks will lead to inter temporal shifts and possibly lower volatility in the Summer… …but overall scarcity dynamics will remain unchanged The changes will result in even more negative net adjusted flow in June and September We expect NCBs to focus their frontloading on the short end of the curve, which could bias 2s10s to steepen
And the supply monitor: Net supply will remain significantly positive next week. Supply will come out of core and Italy. ECB frontloading QE ahead of the summer
Net supply eased in May
ECB Executive Board member Benoit Coeure announced in a
In EUR bn
0
backloading in September when market liquidity is expected to improve again’. Weekly data suggests that the ECB has
Dec
Nov
Oct
Sept
-15
‘need be, the frontloading may be complemented by some
Aug
-10
notably lower market liquidity’. In addition, he added that if
Jan
holiday period from mid-July to August characterized by
July
-5
June
patterns in fixed-income market activity with the traditional
5
May
Indeed, he said that the frontloading reflected ‘seasonal
10
Apr
new issuance will dry up and activity eases due to holidays.
15
March
purchases in May and June ahead of the summer lull, when
Feb
speech earlier this week that the ECB would frontload asset
Net supply
already started to pick up the pace of purchases. Source: Bloomberg, DFA
Frontloading makes sense The frontloading policy of the ECB makes sense and shows
ECB purchases pushes net supply in negative territory
that the ECB is willing to accommodate its purchasing pattern
The general pattern from most months is scarcity of
to changing market conditions. Net supply of government
government bonds given weak net supply and large ECB
bonds jumped in May after being weak in the first few months
purchases. The graph below shows the significant seasonal
of the year. For instance, net supply of German government
effects of ongoing ECB purchases on net supply, which we call
bonds was negative in January-April, but became significantly
net adjusted flow. We assumed a constant pace of Bund
positive in May (see graph below). It will become negative
buying. The graph shows in contrast to our net supply graph
again over the Summer and December, when activity is
that only in August there will be a slight positive net adjusted
generally low. In any case, May is one of the few months of the
flow. All other months will be accompanied by negative net
year where scarcity of core government bonds has eased.
adjusted flow as the ECB purchases continue to overshadow net supply dynamics.
Insights.abnamro.nl/en
Bloomberg: ABNM