ECB Will Reinvest Maturing QE Bonds Over a Year in Revised Plan

(Bloomberg) -- The European Central Bank extended its window for reinvesting bonds held under its quantitative-easing program, giving itself one year instead of three months to make purchases.

The move is aimed at ensuring the central bank has the flexibility to avoid rocking the market, given that the value of bonds maturing from the 2.6 trillion-euro ($3 trillion) portfolio can vary wildly from month to month.

The reinvestment program has gained a new prominence after the ECB decided on Thursday to stop adding to its QE holdings, a landmark decision marking the end of almost four years of purchasing debt to fend off the threat of deflation.

“During the reinvestment phase the Eurosystem will continue to adhere to the principle of market neutrality via smooth and flexible implementation. To this end, the reinvestment of principal redemptions will be distributed over the year to allow for a regular and balanced market presence.”

Key Insights

  • The full ECB statement is here.
  • The ECB aims to maintain the size of its cumulative net purchases under each part of the asset-purchase program -- public sector debt, asset-backed securities, covered bonds, and the corporate bonds -- at their respective levels as at the end of December 2018.
  • Allocation across eligible jurisdictions will continue to be guided, on a stock basis, by ECB capital key, which will be amended over time.
  • “As a rule,” redemptions will be reinvested in the jurisdiction in which principal repayments are made, and “any adjustment to the portfolio allocation across jurisdictions will be gradual and will be calibrated to safeguard orderly market conditions.”
  • Covered bonds from the third covered-bond program “with a conditional pass-through structure” will be excluded from purchase as of Jan. 1.

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