ECB wants to keep a lid on long-term yields when it stops making net new purchases - Rabobank

"On 29/06/18 a Reuters article that quoted five ‘ECB sources’ was published entitled “ECB mulls small ‘Twist’ to keep borrowing costs low.” This attracted significant interest from the market given its potential implications for the shape of Eurozone (EZ) sovereign yield curves," Rabobank analysts note and go on to explain the four separate elements that they think the article pointed out to.

"The ECB is concerned about the ‘natural ageing’ (i.e. declining duration) of its Asset Purchase Programme (APP) bond portfolio when it stops making net new purchases at the end of December 2018. We would take this statement to be specifically referring to the Public Sector Purchase Programme (PSPP) component of the APP."

"The ECB wants to keep a lid on long-term yields when it stops making net new purchases."

"In order to accomplish the maintenance of the duration of the PSPP portfolio, the ECB will consider buying longer-dated bonds (which it defines as having a maturity
of greater than 10yrs) when making reinvestments of the cash received from maturing bonds. In doing so it could also deviate (albeit in a minor fashion) from the
capital key."

"Maintaining the duration of the PSPP portfolio is seen as a more palatable option than increasing purchases of corporate bonds under the Corporate Sector Purchase Programme (CSPP). "

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