European Bonds Seen Riding ECB Reinvestment Wave From Mid-April

(Bloomberg) -- Just when it looked like the euro-area bond rally may have lost some of its steam, the market is set for a central bank boost.

An estimated 21.1 billion euros ($23.7 billion) of funds will flow into regional government debt markets this month as the European Central Bank reinvests proceeds from maturing securities. That’s the largest such amount since the ECB discontinued incremental asset purchases at the end of 2018.

The inflows should provide significant support to euro-area bonds in line with the central bank’s capital key guidelines, especially amid typically thin market liquidity around Easter, according to Commerzbank AG. In total, more than 100 billion euros of bond coupons and redemptions from Germany, France, Italy and Spain are due in April, starting next week.

The ECB’s public sector purchase program portfolio has remained broadly stable since the end of December, head of fixed-rate strategy Christoph Rieger wrote, noting that Germany has a year-to-date shortfall of 7.2 billion euros, while Italy and France have been overbought by 5.1 billion euros and 3.2 billion euros respectively. “If the ECB aims to keep its overall portfolio holdings stable each month, PSPP flow support will continue near-term for all large countries.”

France and Spain, which together account for around 70 billion euros of the total inflows, have been the main beneficiaries of annual April coupon and redemption payments going back to 2010, according to Bank of America Merrill Lynch. The recent pickup in Spanish two-year and French 30-year yield premiums over German counterparts “should be a good opportunity to position for the April seasonality,” strategists Erjon Satko and Ruairi Hourihane wrote in a note.

Deutsche Bank AG strategists including Ioannis Sokos recommend buying 10-year Portuguese securities, given the anticipated support from ECB reinvestments, while selling comparable German debt.

To contact the reporter on this story: James Hirai in London at jhirai3@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Anil Varma, Scott Hamilton

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