Shopping Cart Shows ECB Buying Italy Over France as Bonds Mature

(Bloomberg) -- The European Central Bank has altered its 60 billion-euro monthly shopping list, providing the first big clue to what investors can expect as its pile of maturing bonds grows.

Should policy makers stick with July’s buying pattern, they look set to boost their already-large support for the securities of more debt-laden countries as re-investments from bond maturities rise. That’s good news for the some of the region’s peripheral economies. The central bank slowed purchases of French debt last month as 4 billion euros ($4.7 billion) of the nation’s liabilities it held fell due, but it boosted the amount of Italian securities it bought.

The ECB bought 1.2 billion euros more Italian debt in July than it should have under its capital key, a GDP-based benchmark of how much it can hold for each country, according to data released this week. That’s the largest deviation from the key since the program started in March 2015. It purchased just 384 million euros more French debt than it should have, compared with a 1.19 billion-euro overshoot in June.

“The clear winner is Italy”, said Andrew Roberts, the head of European macro research at NatWest Markets in London. “This represents a vary major support for BTPs.”

Italy’s 10-year bond yield fell for a fourth successive month in July, the longest winning streak in about a year. Its yield spread over matching German bunds narrowed 14 basis points in the month, outpacing a nine basis-point decline in the French equivalent.

Limited Options

At its peak, the ECB was buying 80 billion euros a month of debt via its Public Sector Purchase Program. In December, President Mario Draghi announced a reduction to 60 billion euros starting in April and running until at least the end of this year.

“If the ECB does indeed add more Italy then at the margin it supports the Italian spread,” said Padhraic Garvey, London-based global head of debt and rates strategy at ING Groep NV. Still, “the bigger driver will be other issues though, like politics and supply,” he said.

But a growing scarcity of German bonds, coupled with redemptions, look likely to benefit France and Italy because their level of indebtedness means plenty of bonds are available to buy. The shortage of available securities is repeated in a number of other countries such as Portugal and Ireland, further limiting the ECB’s options for new purchases.

“Reinvestment flow from redemptions is set to become a more important factor going forward,” Thomas Hoppe Rosenlund, a Copenhagen-based analyst at Danske Bank A/S, said by email. That will be especially true in the first half of 2018, when a large amount of German debt in the ECB’s holdings is due to mature, he said.

--With assistance from John Ainger

To contact the reporters on this story: Stephen Spratt in London at sspratt3@bloomberg.net, Conor Molumby in London at cmolumby@bloomberg.net.

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Samuel Potter