FIXED INCOME STRATEGY

The limits of “no limits”

27 set 2017
por Jeffrey Rosenberg, Joseph Di Censo, Michael Krautzberger

The European Central Bank (ECB) is running into self-imposed limits on its asset purchases. An improving growth outlook and the fading of deflationary fears are also fueling market expectations for an ECB policy adjustment. This month we shine a spotlight on the ECB, its expected policy shift and the potential market implications.

Fixed income highlights

  • An improving growth backdrop should eventually lead to a sustainable move higher in eurozone inflation, justifying a removal of monetary accommodation. But we see inflation moving sideways in the near term –well below the ECB’s target. This is why we expect any reduction in ECB asset purchases to be modest and gradual.
  • The ECB is running out of bonds to buy under its asset-purchase program. Its ownership share of German bunds threatens to breach a self-imposed limit in the first half of 2018. This suggests the central bank may need to tweak its quantitative easing program soon, while keeping policy accommodative overall.
  • We are maintaining a defensive stance on European debt, given risks that appear skewed toward higher rates. We see euro corporate spreads as fairly priced versus global alternatives, but low yields leave little margin of safety.

Snapshot

The ECB’s balance sheet has ballooned. The rapid growth in its holding of securities for monetary policy purposes – including holdings of government bonds and corporate credit – has helped double its size since 2015, as the chart shows. The central bank trimmed its monthly asset purchases to 60 billion euros in April until the end of 2017, from 80 billion euros previously – and could cut the pace further as it runs into limits.

Before the fall
ECB balance sheet, 2017

ECB balance sheet, 2017

Source: BlackRock Investment Institute, with data from Thomson Reuters, July 2017.
Notes: The colored areas represent different categories of assets on the ECB balance sheet. Other includes gold and gold receivables, general government debt denominated in euro, claims on non-euro area residents in euro, marketable securities that are not related to the monetary policy operations of the Eurosystem and other assets (securities, equity instruments, fixed-term deposits and current accounts, participating interests and/or investments in subsidiaries). Claims in foreign currencies include claims on euro zone residents in foreign currency and claims on non-euro area residents in foreign currency. LTRO refers to long-term refinancing operation. The Eurosystem started to buy public sector securities under the public sector purchase program (PSPP) on March 9, 2015.

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Jeffrey Rosenberg
Chief Fixed Income Strategist
Jeffrey Rosenberg, Managing Director, is BlackRock's Chief Fixed Income Strategist with responsibilities in developing BlackRock's strategic and tactical views.
Portfolio manager, BlackRock’s Global Fixed Income Group
Head, BlackRock’s Pan-European Fixed Income Team