LONDON: A slide in German bond yields into negative territory means the European Central Bank risks running out of German debt to buy for its asset-purchase programme within months unless it eases its own restrictions on purchases.
These rules bar the ECB from buying bonds yielding less than its deposit rate of -0.40 percent, putting around half of the eligible 800 billion euros of German bonds on its shopping list out of reach.
The central bank may have to consider scrapping the minimum yield limit or dropping a rule that prevents it from holding more than a third of any bond issue. Such steps would ease pressure on the $1.74 trillion euro bond-buying programme, which is due to run until March 2017.
Many analysts expect the scheme to be extended because inflation, which it was designed to kickstart, remains low.
The ECB is already running into its bond-buying limits in smaller countries such as Portugal but the scarcity of eligible bonds is becoming more pressing in Germany -- the euro zone's biggest economy, where most purchases are made. German bonds with maturities out to five years have yields below the deposit rate, and jitters about next week's UK referendum on European Union membership on Tuesday pushed the benchmark 10-year Bund yield below zero for the first time.
That means investors now pay to lend money to Germany's government for a full decade.
Jefferies International predicts the ECB could run out of German bonds to buy in its chosen two- to 30-year pool in three months; Danske estimates it could hit limits by October; and Citi said problems would occur in the fourth quarter.
These calculations are based on current yield levels. If yields rise, the pool of available bonds increases.
"By the time we get to Q4, unless something changes, it's hard to see where the German Bund purchases are going to come from," said Jamie Searle, rates strategist at Citi in London.
TIME FOR CHANGE?
The quantitative easing programme, launched in March 2015, is restricted by rules designed to reduce its risks: as well as the yield, maturity and bond issue limits, the ECB can only buy bonds in proportion to each country's contribution to the ECB's capital, the so-called capital key.
"I don't see any need for such changes now and I believe there is sufficient supply for the current programme but we will make changes if we have to," said one member of the ECB's governing council, who asked not to be named.
"This is all quite technical and doesn't impact the design of the programme." He said the first obvious step could be to raise the issue limit for bonds that do not carry a collective action clause.
The ECB raised this limit to 33 percent from 25 percent in September 2015. The ECB declined to comment.
Frederik Ducrozet, senior economist at Swiss wealth manager Pictet, said that increasing the limit further from 33 percent to 50 percent could buy the ECB an additional 12 months of German bond purchases.
"Since it is very likely that the ECB extends QE beyond March 2017, they will need to change the rules again, possibly as soon as September," he said.
Because of specific bond issue limits, Jefferies International estimates the ECB may have as little as three months' worth of German bonds to buy for QE at the current monthly rate of 19.6 billion euros.
Its calculations are based on expected bond issuance in the euro zone this year less the bonds that would be ineligible for purchase.
Because of a scarcity of bonds from smaller countries, the ECB bought more German, French and Italian government bonds in May than its rules dictate. It began buying corporate bonds last week, which could help ease pressure on government bond purchases, alongside purchases of municipal and agency debt launched earlier this year.
Municipal bond purchases are primarily geared towards Germany. "Maybe the pace of (government bond) buying slows down because of corporate bond buying," said Marchel Alexandrovich, senior European economist at Jefferies. "But say they buy 15 billion euros instead of 19 billion a month, that only extends the available pool of German bonds by 1-1/2 months and if yields go lower and more bonds are swept below minus 0.40 percent, the job becomes much tougher."
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