Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Bloomberg is out a few minutes ago with details of the ECB’s Draghi has planned in terms of bond buying. The surprise is that it will be sterilized which means it won’t add to the money supply, unlike how we do things in the U.S. (excluding Operation Twist). My take is that appears to be a concession to the Germans. However it will relieve short term pressure on countries that are willing to submit to the plan as it is unlimited in nature. Of course it does nothing on the long end.
There have been a lot of rumors of a “secret rate cap” or a “rate band” leaked the past few weeks but they seem to have decided against that as well. As noted yesterday they are willing to go up to 3 year debt securities. This is a well timed leak so the market is not surprised tomorrow. Initial market reaction is benign, futures quickly jumped about 0.3% on the news but have fallen back some.
- European Central Bank President Mario Draghi’s bond-buying proposal involves unlimited purchases of government debt that will be sterilized to assuage concerns about printing money, two central bank officials briefed on the plan said. Under the blueprint, which may be called “Monetary Outright Transactions,” the ECB would refrain from setting a public cap on yields, according to the people, and a third official, who spoke on condition of anonymity. The plan will only focus on government bonds rather than a broader range of assets and will target short-dated maturities of up to about three years, two of the people said.
- The officials said policy makers are likely to adopt the proposal, with Germany’s Bundesbank remaining the sole objector. At the same time, one said Draghi’s relationship with Bundesbank President Jens Weidmann remains relaxed, and the two men only disagree on whether risks inherent in the bond plan are likely to materialize.
- To sterilize the bond purchases, the ECB will remove from the system elsewhere the same amount of money it spends, ensuring the program has a neutral impact on the money supply.
- While the ECB doesn’t expect to have to spend large sums of money on bonds, Draghi’s plan calls for no limits to be set, two of the officials said. The ECB also won’t have seniority on any bonds it buys, they said. No yield-spread targets or bands will be set publicly, they said. Two said targets won’t be set internally either and that interventions will be discretionary.
- Draghi will stress conditionality of the program tomorrow, with the ECB likely to stop buying the bonds of any government that fails to meet the conditions it agrees to when it signs up for aid from Europe’s rescue fund — a precondition for ECB action — two of the people said. Another proposal is for the ECB to sell the bonds it has bought if a country doesn’t comply with the conditions, two of the officials said.
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