zerohedge.com / by Tyler Durden / Sep 8, 2016
While there have been various trial balloons in recent days, hinting that the ECB could start purchasing equities, most notably by the Peterson Insitute, it is unlikely that Mario Draghi will commence outright monetization of ETFs at the ECB’s meeting tomorrow. Still, that does not change the fact that the ECB is rapidly running out of bond to government monetize, which has pushed government yields to all time negative lows, and has so distorted the corporate market that non-backstopped corporations have issued negative yielding bonds: an unheard of event. On the other hand, if the ECB relents, and does nothing, it may be perceived as a sign of tightening, spiking bond yields and sending equities tumbling.
Adding to the pressure, the existing version of the ECB’s €1.7 trillion QE asset-purchase program is scheduled to end in just six months, however so far Draghi has failed miserably at spurring euro-area inflation while the full impact of Brexit has yet to be realized. If the ECB extends quantitative easing – as most economists surveyed by Bloomberg predict – policy makers may have to reconsider what they can buy.
UBS best summarizes the dilemma Draghi finds himself in: “Generally, we observe a dilemma on the side of the ECB: The stronger the credibility of the QE programme, the lower the yields and hence the smaller the availability of bonds trading above the minimum of -0.4% (depo rate). Conversely, the lower the credibility of QE, the higher the yields (at least for shorter maturities), and hence the larger the pool of bonds trading above the minimum rate of -0.4%.”
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