When QE started in March the common perception was that scarcity of government bonds would lead the ECB to dilute the modalities related to government bond purchases.
The recent shakeout has in part been about a significant dilution of these expectations helping to:
1) reduce the number of bonds that trade in negative territory as well as
2) a sharp steepening of the yield curve.
What is interesting is that the ECB is focused on broadening the universe of eligible agency bonds as opposed to government bonds purchases. This seems to be the hint from ECB Mersch’s speech today where he said “we continue to broaden our universe of eligible agency bonds”.
The purchase of agency debt falls under the category of credit easing as opposed to pure QE as this directly lowers the funding costs to supranational lending institutions.
The ECB’s rationale for buying more agency debt is so “not to become the largest creditor on the euro area”.
Mersch had been sceptical about QE but continues to sing along to the tune that it’s full implementation is required to see a sustained return of inflation back toward the 2% target.
