Europe’s bond rout unlocks $635bn of debt for ECB buying

The selloff in euro region bonds this month has delivered a boost of more than €580bn ($635bn) to the European Central Bank’s asset-purchase programme.That’s the amount of quantitative-easing eligible bonds that have seen their yield cross above the central bank’s minus 0.4% deposit rate in October through Thursday, passing through the threshold for purchases. At the start of the month, almost a third of the securities that comprise the Bloomberg Eurozone Sovereign Bond Index were off limits under this criteria.This exacerbated investor concern that President Mario Draghi’s quantitative-easing plan was running out of wiggle room, especially in core-European bonds such as Germany, where the scarcity levels were most pronounced.A slump in UK bonds last week spread across Europe as faster inflation and signs of a recovery in developed economies had investors questioning how long central banks would keep adding to stimulus. Fixed-income securities across the world are on course for their worst month since May 2013, handing investors a 2.9% loss, according to the Bloomberg Barclays Global Aggregate Index.“The rise in yields means the supply constraints are being alleviated,” said Richard McGuire, head of rates strategy at Rabobank International in London. This is mostly true in “terms of the ECB being able to access core bonds, which is where supply issues are most acute.”Germany’s five-year note yield climbed 11 basis points, or 0.11 percentage point, last week to minus 0.39% on Friday in London. The yield had been below the deposit rate since June. The 0% security due in October 2021 dropped 0.55, or €5.50 per €1,000 face amount, to 101.955. The yield has jumped 18 basis points this month, the biggest increase since December 2013.Bonds with a market value of €1.76tn had yields below the ECB’s deposit rate on October 1, according to data compiled by Bloomberg, making up about 30% of the region’s total. That fell to €1.15tn by Thursday, which, after taking into account the ECB’s other criteria, increases the QE-eligible portion of euro-area debt by about €580bn.While the ECB is forecast by economists in a Bloomberg survey to tweak and extend its stimulus programme, which is currently scheduled to run until at least March 2017, the recent move higher in yields may reduce pressure for a change to the rules at its next policy meeting in December.The ECB wants “as much flexibility as possible,” said Allan von Mehren, chief analyst at Danske Bank in Copenhagen. “They want as much information as possible before they make any changes and this is buying them some time,” he said, referring to the increase in bond yields.