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A look at ECB's possibilities if it launched covered bond purchases - Deutsche Bank

FXStreet (Łódź) - Jim Reid, Head of Global Fundamental Credit Strategy at Deutsche Bank, looks at the universe the ECB could buy into if it decided to start purchasing corporate bonds.

Key quotes

"According to ECB data there are around €1.4tr of eligible corporate bonds to use for collateral for its repo operations – whose main requirement is that assets be Euro currency."

"However this number is based on their repo operation guidelines and to put things in a wider and more detailed perspective we've run our own numbers and have spliced and diced them a few different ways."

"Looking at the iBoxx EUR, GBP and USD IG indices (which cover a universe with the type of more liquid corporate bonds the ECB might be in the market for) the current total market value of the bonds in these three indices is around €5.4tr, of which around €1.5tr is Euro currency. If instead we look at those bonds issued by euro area firms across currencies then this number falls to €1.2tr."

"There remains a lot of uncertainty over whether the ECB would be able to buy financial debt, so if we just look at euro denominated, non-financial debt there is around €840bn available."

"Finally given that the ECB’s current ABS and covered bond programs only cover euro area, EUR denominated debt, if focus on this we end up with a total eligible non-financial iBoxx market of about €540bn worth of bonds, although we’d stress that these are rough numbers and we're making a lot of assumptions around what the ECB would or wouldn’t be willing to purchase."

"The key point here is that if the ECB went down this route and were too restrictive they would quickly limit the universe they could buy into. This could cause serious distortions. Liquidity is not great in credit at the moment and this wouldn't help. In fact it could create a large squeeze."

South Africa Consumer Price Index (MoM): 0% (September) vs previous 0.4%

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