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28 Jan 2015
The longer QE lasts, the more difficulties the Bundesbank will face – Nomura
FXStreet (Barcelona) - Richard Koo, Chief Economist at Nomura, comments that the Bundesbank will face difficulties the longer the QE lasts as German yields might turn negative when the buying commences, with chances of heavy capital losses being eminent when monetary policy is normalised.
Key Quotes
“National central banks will not incur capital losses if they hold the bonds they purchase until maturity. But it will be difficult to do that with the 30y bonds that will be bought under the ECB plan.”
“Any central bank that purchases bonds at a negative yield, which is now true of all German bunds out to the 5y sector, will inevitably incur a loss upon redemption. Nevertheless, the ECB president declared at his press conference that even bonds with negative yields would be acquired under the plan.”
“Given the current state of the German yield curve, yields could easily turn negative out to the 10y sector once the Bundesbank’s buying commences. The more the Bundesbank tries to avoid those yields by shifting its purchases further out on the curve, the larger the capital losses that will be sustained when monetary policy is normalized, and the longer the bonds will have to be held (until maturity) to avoid such an outcome.”
“Finally, if central banks are to continue holding these bonds even after interest rates have returned to normal levels, they will need to pay interest on the excess reserves already supplied to the financial system, and current low to negative yields on bunds suggest the German central bank will be facing a negative spread at that point in time.”
Key Quotes
“National central banks will not incur capital losses if they hold the bonds they purchase until maturity. But it will be difficult to do that with the 30y bonds that will be bought under the ECB plan.”
“Any central bank that purchases bonds at a negative yield, which is now true of all German bunds out to the 5y sector, will inevitably incur a loss upon redemption. Nevertheless, the ECB president declared at his press conference that even bonds with negative yields would be acquired under the plan.”
“Given the current state of the German yield curve, yields could easily turn negative out to the 10y sector once the Bundesbank’s buying commences. The more the Bundesbank tries to avoid those yields by shifting its purchases further out on the curve, the larger the capital losses that will be sustained when monetary policy is normalized, and the longer the bonds will have to be held (until maturity) to avoid such an outcome.”
“Finally, if central banks are to continue holding these bonds even after interest rates have returned to normal levels, they will need to pay interest on the excess reserves already supplied to the financial system, and current low to negative yields on bunds suggest the German central bank will be facing a negative spread at that point in time.”