ECB: Tapering risk revisited – BMO CM

At the ECB’s December 12th policy meeting, Research Team at BMO Capital Markets, expects an announcement of an asset purchase tapering schedule that includes an extension of purchases beyond the current March 2017 deadline.

Key Quotes

“The ECB is running out of assets to purchase, but the market is not currently prepared for a drastic decrease in monetary policy accommodation. Austrian Governing Council member Nowotny has already acknowledged that the ECB essentially can no longer purchase covered bonds in the secondary market, saying that the program is approaching its limits. “

“Per current ECB policy, asset purchases are set to drop to zero beginning April 1, 2017 from the prevailing €80 bn per month pace, a rapid decline in accommodation.”

“Once the ECB unveils the details of the reduction in asset purchases, EUR-denominated SSA spreads may widen significantly, which would put widening pressure on USD SSA debt as well.”

“Finally, technical headwinds in the New Year could also contribute to high quality credit spread widening.  Most SSA borrowers are calendar year funders and January is typically the heaviest issuance month of the year representing about 15% of global annual debt issuance. Spreads are likely to widen as the market digests the heavy new supply at a time when political risk remains high.  In fact, some cracks in demand are already beginning to appear into the heightened political risks. Only two MTN deals have been priced since the U.S. elections, and both struggled.”