ECB has to modify parameters of the QE programme - BNPP

Research Team at BNP Paribas, suggests that the rise in risk aversion following the outcome of the UK referendum has caused a further fall in German government bond yields.

Key Quotes

“They are now negative with a maturity of up to 15 years. Around 60% of Bunds are no longer eligible for the public securities purchase programme (PSPP). As a reminder, the ECB cannot buy securities with a yield lower than the deposit facility (currently -0.40%). The Bund scarcity is a problem for the QE implementation: purchases are subject to a distribution key that depends on each member state’s share in the ECB’s capital.

It is more and more likely that the ECB has to modify one or several parameters of the PSPP programme. An increase in the issuer limit (from 33% to 50%) is possible but limited to sovereign bonds without CAC. It would not be sufficient especially if, as we forecast, QE is extended by 6 months. A deviation from the capital key and/or the removal of the deposit rate floor could become necessary.”