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Expectations of another cut of the ECB’s deposit rate complicate QE implementation

In the chart below, we computed the “break-even” maturity for which the yield constraint bites for German securities. Currently, this “break-even” maturity is close to 7 years, which clearly limits the stock of PSPP-eligible German securities. Note that this “break-even” maturity has risen dramatically after the October governing council (Draghi said that -0.20% was not the lower bound anymore) and fell after the deposit rate cut in December.

What it is particularly interesting is that until now, the average maturity of new PSPP purchases (only the average maturity for the stock is published) has been just above 7 years. So the Bundesbank has probably to buy far more than usual on the long-end or very long-end of the curve, what may be behind the so sharp drop of LT German yields in February.

The thing is that this “break-even” maturity is so high as there are expectations of a new deposit rate cut. So there are three possibilities:

  • The ECB cuts the deposit rate and this make a large share of German securities PSPP eligible again. The pressure on LT yields coming from current Bundesbank purchases might be alleviated.
  • The ECB does not cut the deposit rate and pledges that -0.30% is the lower bound: ST yields would rise, the “break-even” maturity would fall and this make a large share of German securities PSPP eligible again. The pressure on LT yields coming from current Bundesbank purchases might be alleviated.
  • ·The ECB does not cut the deposit rate and does not say anything about the lower bound: ST yields would rise (but less than in the previous case), the “break-even” maturity would fall (but less than in the previous case). The pressure on LT yields coming from current Bundesbank purchases might be alleviated (but less than in the previous case).
Graph_Taux-depot-QE-BCE
DRUT Bastien , Fixed Income and FX Strategy
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Expectations of another cut of the ECB’s deposit rate complicate QE implementation
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