LONDON Oct 12 For all the speculation in the
past week about a "tapering" of ECB asset purchases, trade in
money markets suggests some investors are betting on the central
bank pursuing its bond buying spree by removing its self-imposed
Talk that the European Central Bank will lift the ban on
buying bonds yielding less than its deposit rate appears to be
gaining ground, prompting benchmark euro zone two-year bond
yields to fall far below money market interest rates.
As this graphic tmsnrt.rs/2dL8rQQ shows, the gap
between two-year German government bond yields, the
euro zone benchmark, and equivalent Eonia rates is
at its widest in around four years.
Eonia is a weighted average of overnight lending between the
most active credit institutions in the euro zone's money market.
"Removal of the depo floor entails the ECB buying across the
curve (2 to 31 years) instead of just buying bonds above the
depo rate," said Uffe Kalmar Hansen, a senior analyst at Nordea.
"Buying across the curve will therefore also impact two-year
bonds where yields would be expected to fall. I wouldn't expect
much movement in Eonia as it is tied to the depo rate. This
would therefore result in spread widening," he said.
Given that markets are not anticipating the ECB will cut
interest rates much further, analysts have been puzzled at the
recent fall in short-dated bond yields and say speculation about
tweaks to the ECB asset purchases help explain the move.
ABN AMRO estimates that removing the depo floor will free up
600 billion euros of German bonds for purchase. It expects the
ECB to take this step and announce an extension of the 1.7
trillion euro programme by six months in December.
"The market is starting to price in the floor removal more.
This is why bonds are outperforming money market rates like
Eonia," said Kim Liu, senior fixed income strategist at ABN
(Reporting by Dhara Ranasinghe; Graphic by Nigel Stephenson;
Editing by Ruth Pitchford)