28/10/2018/Fitch Ratings
Fitch Ratings says ECB purchases of Eurozone sovereign debt have far outweighed net issuance since 2015, raising the risk of increased bond market volatility as quantitative easing (QE) comes to an end. QE purchases by the ECB have played a key role in absorbing the increase in Eurozone government debt since the beginning of 2015 and their scheduled termination in December 2018 will require private sector investors to fill the gap.
The scale of the forthcoming shift in market conditions is highlighted by the latest chart of the month from Fitch’s economics team, which shows the cumulative increase in the stock of government debt securities since the end of 2014 broken down by type of creditor: the central bank, other domestic creditors (including financial institutions) and non-residents. It shows that QE has more than covered the increase in sovereign debt during the QE period by a factor of 1.5 in Italy, France and Spain, while in Germany QE purchases have accompanied a fall in the overall stock of debt outstanding.
The cumulative purchases made by the central banks of Germany, France, Italy and Spain have, in aggregate, amounted to almost 3 times as much as the increase in those four countries’ aggregate stock of debt since the end of 2014. The corollary of this has been a reduction in holdings by other domestic investors and (with the exception of Spain) by non-residents.
Central banks’ share of total government debt has increased manifold since the start of QE, with the largest being in Germany; the increase in the Bundesbank share has been 16pp since the start of QE. The Bank of Italy’s share of government debt today stands at close to 20% after an increase of 14pp.
ECB QE has likely played a significant part in the compression of global yields (see our August’s chart of the month), but the impact on Eurozone bond yields has been more powerful and direct. Arguably the QE ‘distortion’ to German yields has been the strongest given shrinking aggregate supply, raising the risk of higher Bund yields when QE ends. But bond spreads over Bunds could also see upward pressure as the search for yield unwinds and net issuance remains positive.