ECB Takes a Break

Yesterday was notable for several reasons but no doubt it will be the final agreement of Greece’s second bailout that steals the headlines. However, we thought it was also worth mentioning that the ECB reported its weekly Special Markets Programme (SMP) bond purchases yesterday. The report is important as it shows how much intervention there has been in the government bond markets.

Last week was the first week (since the SMP was reopened in the first week of August last year) that the ECB did not make any purchases of peripheral sovereign debt. By way of context, the ECB has bought nearly €200bn of such bonds in the preceding 24 weeks, making it unquestionably the most important buyer.

The 3 year LTRO’s combined with improved market sentiment, have allowed the ECB to gradually step away from this intervention. Even the Portuguese government bonds which had moved against the rally (Portuguese Underperformance Jan 31st) until this month, have finally caught a bid, with the 10year yield now down to less than 12%. The BTP future (Italian government bond), which is one of the best barometers of market sentiment, is now trading at the highest level since the end of August last year. Thus, the ECB has clearly had a material influence on markets in the last 6 months, and we should therefore follow their steps closely.

This now brings up the question of profits. While the ECB is busy propping up markets by buying in the times of most stress, when (and if!) bonds finally mature at 100, there will be large gains to be had for the ECB. The ECB has indicated a willingness to return these profits to the countries from which they were gained.

This is probably as far as Mr Draghi is able to go in terms of supporting countries debt with his balance sheet currently. So far it has worked effectively, although those that had the risky positions during this bout of volatility will not necessarily thank him for the ride.