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Friday, April 24, 2015 1:32 PM

ECB Buys Negative Yield Covered Bonds; Trade Guaranteed to Blow Up

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In a move 100% guaranteed to blow up at a later date, the ECB Said to Start Buying Covered Bonds With Negative Yields.

The European Central Bank started buying covered bonds with negative yields as its asset-purchase program reduces the supply of the highly rated debt, according to two people familiar with the matter.

The central bank bought the debt in the past two weeks, said the people, who asked not to be identified because the information is private. The notes were from Germany, one of the people said.

The ECB has bought 69.7 billion euros ($75.5 billion) of covered bonds since October as part of its latest measures designed to stimulus growth in the euro area. The accumulation of assets is driving down yields and the central bank now holds about 15 percent of the market, according to ABN Amro Bank NV.

“The ECB has caused this situation by being a big buyer and has exacerbated the already negative net supply of covered bonds,” said Joost Beaumont, a fixed-income strategist at ABN Amro in Amsterdam. “If the ECB buys more, yields will go still lower and that’s going to affect the ECB itself.”

The ECB, which is also buying government bonds and asset-backed debt, has said it will buy negative-yielding securities up to its cash deposit rate of minus 0.2 percent.

An ECB spokesman declined to comment on its covered debt purchases.

“Supply in positive yields is getting scarce and the ECB may have no other choice to fulfill its targeted purchase volume than to buy negative-yielding bonds,” said Tobias Meyer, an analyst at Norddeutsche Landesbank in Hanover, Germany.
Trade Guaranteed to Blow Up

I agree with Beaumont's comment this is "going to affect the ECB itself".

In fact I will go one further and suggest this is a "trade guaranteed to blow up", I just cannot say when or even in precisely what ways.

Mike "Mish" Shedlock

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