Buying ABS - Mario Draghi refused to put a number to the ECB’s new asset purchase programme. Let’s try for him. Of the €1tn outstanding ABS about a third is not acceptable collateral. Next consider that in order to revive the market buying everything eligible is not an option either. As a cross check the Federal Reserve owns a third of the agency MBS market in America. By that benchmark the ECB’s potential pool is closer to €200bn plus a share of any new issuance. How does that number translate into new lending? Certainly being mostly restricted to senior tranches does not free up much bank capital. And €200bn of additional liquidity only makes up for LTRO repayments year to date. What is more half of all eligible securities already sit with the ECB as repos hence the incremental liquidity is smaller still.
While the ECB has so far demurred from reinitiating outright purchases of Eurozone sovereign debt, the relatively small size of the Eurozone’s ABS market suggests that it will have little choice but to explore sovereign purchases if it wishes to increase the size of its accommodation.
The German Jumbo Pfandbriefe represents one of the most mature and most liquid asset backed securities markets in Europe. The yield on the 5-yr is currently trading at 0.42% and remains in a consistent downtrend.
This additional note from Deutsche Bank may also be of interest. Here is a section:
The question is if they can find enough ABS and covered bonds to buy, see also the chart below. The direct impact on economic activity of balance sheet expansion is very limited. Instead, the main transmission channel of monetary policy here is via a depreciation of the euro. Expect EUR/USD to continue to grind lower, this is good for European exports and for European inflation and hence also for the ECB.
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