- All eyes on the reinvestment policy: Monthly net purchases under the ECB’s QE program are expected to end come January. The pledge to reinvest maturing bonds will help cushion the impact on financial conditions by ensuring that the ECB maintains a hefty presence in eurozone bond market.
- Implementation bottle necks & tighter financial conditions: Maintaining the current degree of monetary policy accommodation would require reinvesting principal in notably longer-dated sovereign bonds. However mounting implementation constraints – particularly in low-debt core countries – would likely force the ECB to tolerate at least a gradual rise in long-term interest rates.
- Desperately seeking flexibility: To ensure the reinvestment policy’s smooth implementation, we expect the ECB to soon opt for more leeway around its modalities. With the exception of temporary deviations, the capital key constraint should remain sacrosanct, but more flexibility regarding the timing of reinvestments and the composition of purchases should already suffice to do the trick.
- The bottom line for eurozone yields: We expect the rise in long-term rates in 2019 to prove more pronounced in non-core countries due to relatively less favorable stock as well as flow dynamics. Italy stands out as the country with the least favorable prospects judged by demand and supply factors underpinning its sovereign bond markets.
The ECB´s reinvestment policy: Issues and options