Empowerment Through Knowledge

Wag the Dog - "There is no B-3 bomber" was Robert De Niro's Machiavellian lesson in getting people talking about a story by denying it. Likewise, ECB denials of a corporate bond buying plan certainly got markets talking. If it happens, this will be the central bank's third plan B after targeted LTROs and ABS purchases - plan A being buying sovereign bonds. How much ammunition does plan B-3 offer? Perhaps €550bn, after excluding financial and non-euro area issuers from the iBoxx EUR investment grade index's €1.5tn universe. One potential pitfall is that relative to GDP, this pool is overweight French issuers (one-third) and short German paper (below a quarter). The sector split is similarly skewed with one-third from utilities. Maybe buying the debt of state-owned utilities - the biggest issuer EDF is 85 per cent government held - will break taboos about outright government bonds purchases. 

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.

Pledging to “significantly steer” the European Central Bank’s balance sheet back toward the 2.7 trillion euros of early 2012 from 2 trillion euros now, the ECB president today announced a final round of interest-rate cuts and a plan to buy privately owned securities. His mission: to revive inflation in the 18-nation euro area.

Fully-fledged quantitative easing as deployed in the U.S. and Japan wasn’t enacted amid a split on the 24-member Governing Council, with Bundesbank President Jens Weidmann opposing the new stimulus and others seeking more. The latest round of measures pushed the euro below $1.30 for the first time since July 2013 and sent European bond yields negative.

The steps “probably reflect that President Draghi does not have unanimity, or a large enough majority for quantitative easing,” said Andrew Bosomworth, a Munich-based portfolio manager at Pacific Investment Management Co. and a former ECB economist. “The ECB is ready to do more if more is needed.”

The ECB contract requires BlackRock to ensure effective separation between its project team working for the central bank and its staff involved in any other ABS-related activities, the ECB spokesman said. External audits related to the management of conflicts of interest will also be made available.

The company, headed by Chief Executive Officer Laurence D. Fink, has more than $4 trillion of assets under management. It is among the largest investors in European ABS, with portfolios spanning debt backed by commercial mortgages to auto loans, according to data compiled by Bloomberg.

The final decision on the design and implementation of any ABS-purchase program will be taken by the ECB’s Governing Council, and the execution will remain the responsibility of the central bank, the spokesman said.

Investment funds indicate 5% entry fee but today most brokers don’t apply them, especially online brokers. Here are the only two ABS fund which I found, and you can buy in Europe, they are open end investment funds:

LU0189453128 Julius Baer ABS
LU0255620626 Nordea Mortgage Backed 

Greece's central bank governor, George Provopoulos, said in an interview yesterday that the ECB Governing Council is now "reflecting" on the design of a quantitative-easing program.

The ECB is "unanimously committed to using all instruments within its mandate, conventional and unconventional, to deal effectively with the risks of a too-prolonged period of low inflation," he said in Athens.

Draghi said on April 3 that the ECB could access a bigger pool of securitized bank loans if only there was a more-liquid market in which to do so. The total stock of outstanding loans in the euro area was 17 trillion euros at the end of 2013, according to ECB data.

"If we are able to have these loans being correctly priced and rated, and traded, like it would happen, like it used to happen in the ABS market before the crisis, then we naturally have a very large pool of assets," he said at his monthly press conference.