(Bloomberg) -- The European Central Bank may need to flood the economy with a record amount of cash to match investor expectations on German bund valuations.
Many euro-area bonds experienced the largest rally of the year on Tuesday as yields tumbled to record lows, after ECB President Mario Draghi hinted at renewed stimulus to help bring back inflation toward 2%. Intervention would come at a price, however. The central bank would need to almost double its excess liquidity to over 3 trillion euros ($3.4 trillion) to keep bund yields at their all-time low this week of minus 0.328%, according to BNP Paribas.
The ECB would have to boost excess liquidity by 1.4 trillion euros, which it could achieve by resuming asset purchases of over 55 billion euros per month for two years, said strategist Eric Oynoyan. To achieve this the ECB would need to raise the limit that national central banks can buy of an individual bond to 50% from 33%.
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This would greatly expand the pool of available debt, which is in short supply. On Wednesday there were only seven positive-yielding German securities out of a total of 39. Such a potential move by the ECB means it’s worth betting on a rally in German five-year debt against interest-rate swaps, as the bonds would outperform, Oynoyan said.
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