Courtesy of Mish.
ECB president Mario Draghi set out to stimulate bank lending by purchasing covered bonds. Yields plunged, which is precisely what Draghi wanted.
Now, the average covered bond yield of 0.53% is so low that investors won’t touch them. Numerous bond deals have been cancelled due to lack of demand. The buyer of only resort is the ECB.
This all transpired since September.
Please consider ECB Blamed for Covered Bond Shortage.
Covered bond supply has reached its lowest level in nearly two decades as the European Central Bank has been accused of crowding out investors from the market by pushing up prices and depressing yields.
European covered bond volumes total $166.2bn for the year to date, the lowest figure since 1996 according to Dealogic. This is in spite of an ECB programme announced in September aiming to stimulate the market.
Last month Allied Irish Banks took the unusual step of postponing a planned 10-year covered bond deal amid market speculation that the yield offered was too low to tempt investors.
“There have been a whole series of deals which have been pulled — not just [the AIB] one,” said a London-based banks analyst. “The ECB is crowding out investors. Covered bond spreads have tightened and real money investors say they are not getting rewarded for the risks they are taking.”
By purchasing covered bonds, the ECB wants to offer additional funding for banks, which, it hopes, will use the cash to boost lending to the real economy.
But amid lower bank funding needs and sluggish economic growth covered bond supply has dried up in traditionally large markets such as Germany. Year-to-date volumes have declined 5 per cent year on year and are less than half the volumes in 2011.
“Buying covered bonds is not the silver bullet that will drive Europe out of the deflationary spiral,” said a London-based debt banker. “It does point towards sovereign QE.”
Japanization of Europe Continues
Economic madness did not help Japan, and it will not cure Europe either. But Central Bankers do not care about losses or failures….
