ECB: Bond shortage could lead to a QE extension  - BBH

According to analysts from Brown Brother Harriman, Draghi added nothing new in the press conference following the decision of the European Central Bank to leave rates unchanged.

Key Quotes:

“Draghi said nothing that surprised the market.”

“The ECB President defended the need for accommodative monetary policy, and the range of other EU policy, including the Juncker investment initiative. Draghi has reiterated his call for structural reforms on the national level.”

“The first question to Draghi from the media was about the shortage of some debt securities, especially in the aftermath of the UK referendum and the decline in interest rates. However, Draghi deflected the question, essentially indicating that there is not sufficient information yet to make such a decision.”

“Although he did not say it in so many words, it would not be surprising if the ECB were to link such a response to a possible shortage (of some debt securities) to a possible decision to extend the bond-buying program that is currently scheduled end next March.”

“Draghi specifically indicated that the ECB Council did not discuss the capital key, which is one of the important criteria in buying government bonds. The capital key is based on the size of a country (GDP and population) which means, for example, that Germany accounts for nearly 20% of the purchases”.

“However, the other criteria, duration, yield, and issue-limit reduce the amount of Greman bunds that are available, and this shortage is expected to become more acute in the coming months.  Note that several other countries now have some bond yields below the ECB's deposit rate, including France, Netherlands, Finland, and Belgium. He suggested there was some flexibility that would be discussed when necessary.”