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Twist And Shout! ECB Considering American-style “Operation Twist” (And Deutsche Bank Will Shout)

This is a syndicated repost courtesy of Online Course Notes For Financial Markets and Banking. To view original, click here. Reposted with permission.

It is no secret that Deutsche Bank in not a fan of The European Central Bank (ECB) and partly blames its woes on the ECB’s monetary policies. So, the announcement of the ECB considering push down the European yield curve further at the mid/long end will not be received with much enthusiasm.

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FRANKFURT (Reuters) – The European Central Bank is considering buying more long-dated bonds from next year to keep euro zone borrowing costs in check even after it stops pumping fresh money into the economy, sources told Reuters.

The move would be reminiscent of the U.S. Federal Reserve’s Operation Twist of 1961 and 2011, which saw it replace short-dated paper with longer-term debt to lower market interest rates and boost an ailing economy.

In the ECB’s case, however, it would be aimed at limiting the natural aging of its 2.6 trillion euro bond portfolio and keeping a lid on long-term bond yields, a key determinant of borrowing costs for governments, companies and households.

As the euro zone returns to better economic health, the ECB is due to stop adding to its pile of bonds at the end of the year. But it will continue to reinvest the money it gets from maturing paper for a long time, to ensure cash in the euro zone remains abundant.

Conversations with five central bank sources show policymakers are wary of seeing long-term yields creep back up as the ECB’s stock of bonds ages, or “loses duration” in market parlance.

To avoid this, the ECB is considering buying more longer-dated bonds, generally seen as maturing in 10 years or more, with the cash it gets from maturing paper, the sources said.

It may also smooth out its reinvestments by occasionally deviating from its “capital key” rule, which dictates that bond purchases reflect the size of each member country’s economy, when needed, they added.

ecb maturities

And on the announcement …

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While the ECB twists, Deutsche Bank will shout!


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