Europe Begins QE

With its first purchases of government bonds under its enhanced stimulus plan, the European Central Bank (ECB) showed it's willing to be patient in its efforts to reignite the euro area's economy.

The ECB and national central banks started buying sovereign debt on Monday under the 19-month plan to inject 1.1 trillion euros (US$1.2 trillion) into the economy. While purchases included bonds from at least five countries, the size of individual trades—at between 15 million euros and 50 million euros—was small relative to the program's goals, according to people with knowledge of the transactions.

“The amount bought may be small to start with, but this will be like a pressure cooker,” said Ciaran O'Hagan, head of European rates strategy at Societe Generale SA in Paris. “They have just switched on the heat and we will need some time for the pressure to mount.”

Euro-area bonds extended a 14-month rally fueled by speculation that buying 60 billion euros of debt a month will create a scarcity of government bonds among buyers of the securities. Yields already fell to record lows across the region as the Frankfurt-based bank follows in the quantitative easing footsteps of the Federal Reserve, Bank of England, and Bank of Japan.

The yield on Germany's 10-year bunds fell the most in six weeks, dropping eight basis points, or 0.08 percentage point, to 0.31 percent at 2:44 p.m. London time, and approaching the record-low 0.283 percent set on Feb. 26.

Gains in Italian bonds were smaller, with the yield on similar-maturity debt slipping two basis points to 1.30 percent. That widened the yield gap between the two to 99 basis points, after it narrowed to 90 basis points on Friday, the narrowest spread since 2010.

“We will see more spread compression ahead,” SocGen's O'Hagan said.

National central banks purchased Belgian, French, German, Italian, and Spanish debt, according to people with knowledge of the transactions, who asked not to be identified because the information is private.

The ECB said in a Twitter post that it had started purchases along with national central banks, while a spokesman for the Bundesbank said it was active in the market from 9:25 a.m. Frankfurt time. The Bank of Finland also confirmed on Twitter that it was buying.

'No Squeeze'

The buying of bonds will be made roughly in proportion to the capital that each member central bank has contributed to the ECB, though that guideline doesn't have to be strictly followed every month. There's also flexibility on what maturity of bonds will be bought by the central banks to reach their target, and acquisitions of asset-backed securities (ABS) and agency debt are also included in the plan.

“They know it will not be easy to purchase 60 billion a month including covered bonds and ABS, so they have to deal very cautiously,” said Patrick Jacq, a senior fixed-income strategist at BNP Paribas SA in Paris. “The market remains in positive territory, but there is no further acceleration, which means that apparently there is no squeeze on any paper.”

Competition for purchases may come from banks requiring bonds to meet regulatory rules, pension funds that need to match their liabilities, passive investors who track debt indexes, and other central banks, which buy European securities as part of their balance-sheet management.

The potential scarcity pushed the average yield to maturity on the region's government debt to 0.538 percent Feb. 26, the least since at least 1995, according to Bank of America Merrill Lynch indexes.

Belgium's 10-year yield tumbled eight basis points on Monday to 0.55 percent and the rate on similar-maturity French debt dropped eight basis points to 0.61 percent.

–With assistance from Eshe Nelson in London and Jeff Black in Frankfurt.

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