Euro Central Banks Step Up Bond Buying, Traders Say

By Paul Dobson

June 29 (Bloomberg) — Euro-region central banks stepped up purchases of Greek, Portuguese and Irish government securities today, traders said, deepening efforts to support the region’s bond market in the wake of the sovereign-debt crisis.

The purchases focused on maturities of five years and below, with some buying interest also shown for longer-maturity Greek bonds, said the traders, who declined to be identified because the transactions are confidential. The extra yield, or spread, investors demand to hold the nations’ securities instead of benchmark German debt narrowed.

The European Central Bank took the unprecedented decision to start buying government bonds last month to help the European Union contain the Greek debt crisis. The ECB said yesterday it bought 4 billion euros ($5 billion) of bonds last week, taking the total purchases as of June 25 to 55 billion euros. Greek debt spreads had been widening, approaching their levels before the EU rescue was announced in early May, amid speculation funds that track bond indexes were selling the debt.

Central banks “are more active than they have been of late,” said Huw Worthington, a fixed-income strategist at Barclays Capital in London. “There has been a lot of volatility in a lot of the spreads, and some concerns of selling ahead of the month end.”

Greek two-year notes rose, sending the yield down 41 basis points to 10.19 percent as of 3:43 p.m. in London. The yield spread with German two-year notes fell 39 basis points to 1001 basis points. The yield on 10-year Greek bonds fell 41 basis points to 10.57 percent.

Greek securities will leave indexes managed by Citigroup Inc., Barclays Plc and the Markit iBoxx index at the end of this month after they were downgraded to junk by Moody’s Investors Service, potentially triggering sales by managers in so-called passive funds.

The Irish two-year bond yield fell 11 basis points to 2.88 percent and equivalent-maturity Portuguese yields dropped nine basis points to 3.61 percent.

12 Responses

  1. Why do you keep talking so bullishly about Europe. Take a look at Ireland if you think austerity is so bullish. Are you talking your book? The Fed buys bonds here, too, but that doesn’t keep the stock market from going down and it doesn’t keep the economy from contracting. Even you have said this. I don’t get you, really. All of a sudden you’re so hyper bullish on Europe. Sheesh!!!

    1. I’m with mike on this one……WTH (what the heck)

      Did you learn something in DC?

      No birthday wish on FB this year:(

      buddy? LOL

  2. Why end this liquidity now?

    ECB Shuts off Liquidity,

    For just under a year, the ECB has offered €442 billion to encourage lending.

    The program is now ending and Spanish banks are screaming about the ECB’s “obligation to supply liquidity”.

    The Wall Street Journal has part of the story in ECB Walks a Fine Line Siphoning Off Its Liquidity.

    The European Central Bank is scrambling to reassure markets that Thursday’s expiration of a €442 billion ($547.46 billion) bank-lending program won’t destabilize the financial system, even as banks across the region remain wary of lending to one another.

    The ECB introduced the 12-month lending facility last summer to encourage private-sector lending and ensure adequate liquidity within the 16-member currency bloc. Since then, the program, which represents more than half the ECB’s liquidity operations, has become a lifeline to banks in Greece, Spain and other countries hit by the region’s debt crisis.

    Spanish banks have been lobbying the European Central Bank to act to ease the systemic fallout from the expiry of a €442bn ($542bn) funding programme this week, accusing the central bank of “absurd” behaviour in not renewing the scheme.

    One senior bank executive said: “Any central bank has to have the obligation to supply liquidity. But this is not the policy of the ECB. We are fighting them every day on this. It’s absurd.”

    Another top director said: “The ECB’s policy is that they don’t want to provide maturity of more than three months. But they have to adapt.”

    A special offer of six-day liquidity will tide banks over until the following week’s regular offer of seven-day funds. On Wednesday, the ECB will also be offering unlimited three month liquidity, and further offers of three-month liquidity will keep banks going until at least the end of the year.

    “The system is just not working,” agrees Simon Samuels, banks analyst at Barclays Capital in London. “We’re approaching the third year of liquidity support and still the market cannot survive unaided.”

  3. I read a Worthwhile Canadian Initiative thread from which it was obvious that those taking part were confused as to how the European monetary system is supposed to work. I’m confused too. Does anyone know of a good plain English beginner’s guide to this system?

    And please will no one direct me to official EU literature. As Steven McGiffen, in the introduction to his book “The European Union: A Critical Guide” said: “….in order to find anything out about the EU, you have in general to wade through sewers full of Europhile nonsense, expressed in the turgid prose at which, for some reason, such people excel.”

    1. I doubt there is one. Have to agree on the assessment of the official lit. To begin with, there are three levels of balance sheets – NCB’s, ECB, and the consolidated E system – each of them more opaque than the other.

    2. Yes there is none.

      This may help you Ralph:

      The national governments have an account at the home NCB just like the US Treasury has an account at the Fed.

      In the US, if X transfer $100 to Y, X’s deposits decreases, Y’s deposits increases and X’s bank owes Y’s bank $100, which they settle at the Fed.

      In the EZ, its the same if the transfer is within the border. For cross-border, if X transfers €100 to Y, X’s deposits decreases by €100, Y’s deposits increases by €100. X’s bank owes €100 more to the X NCB and Y’s bank owes €100 less to Y’s NCB. X NCB owes €100 to the Y NCB and X NCB and Y NCB settle the account at the ECB at the end of the day. The ECB lends the NCBs if their accounts go below zero.

      Since X bank owes €100 to X NCB, and the lending rate is higher than the target, X bank will try to borrow €100 from another bank which may be Y bank itself. Again another set of transactions involving the NCBs.

      The institutional setup of the Euro Zone is an overdraft type and banks are permenantly indebted to the Eurosystem.

      The weekly MRO operation is to provide that much liquidity which helps the ECB target the overnight rates.

      Fine tuning operations are done by moving government deposits in and out of the banking system. When the government deposit is moved into the banking system, reserves increase and if reserves need to be decreased, the NCBs move government funds back into the NCB’s account.

      1. Meaning ?

        I was describing a “normal situation” if you are talking of the recent increase in banks’ deposits with the Eurosystem.

      2. Ramanan: Thanks. You say the Euro Zone is an overdraft type and banks are permanently indebted to the Eurosystem. Does that mean the ECB does not supply the private sector, directly or indirectly, with net financial assets? If so, could that be one of the things wrong with Europe? After all, modern monetary theory says that in a recession, the private sector SHOULD be supplied with more net financial assets.

      3. Since the member country central banks usually are paying agents for the member country government, that also controls the bank, what checks are there that a ‘rogue’ central bank might not simply inflate the euro within the context of bank accounts of that country?

  4. I am not bullish on the euro zone economy and thought I stated that clearly.

    I do think it will muddle through for a while between maybe -1 and +1 % gdp growth.

    Any strength in net exports will cause the currency to rise and wipe out that strength just like it’s always done.

    They can have weak GDP, flat to rising unemployment, a strong currency, all without solvency risk, if the ECB has indeed decided to fund the national govs even as they deny any such policy.

    And with markets discounting solvency risk there can be a substantial one time adjustment upward as they no long discount solvency risk.

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