From next year onwards, the Eurosystem is no longer going to be making any new net purchases within the framework of its asset-purchase programmes, instead only reinvesting principal payments on maturing securities. At its coming meetings, the ECB Governing Council will be putting more concrete flesh on the bones of its reinvestment policy; in principle, it can be assumed that the ECB will aim for as much flexibility as possible. Given, however, that the central bank’s current forward guidance refers to an “extended period“ during which principal payments are to be reinvested in full, a clear statement is not on the cards as yet. However, if parallels are drawn with the Fed’s behaviour, the ECB could well begin to reduce its balance sheet around three years after discontinuing its new net bond purchases. The other side of the coin here is that the Eurosystem – given the sizeable volume of maturities still outstanding – is going to remain a steady factor on the demand side in the foreseeable future in the bond segments affected by the APP.
The cornerstones of the reinvestment programme should be those already familiar from the APP: the Eurosystem will continue to take its bearings by the ECB’s capital key and will endeavour, if possible, to cause no disruptions on the markets covered by the programme (principle of market neutrality). In accordance with this, no adjustments to these parameters are to be expected. This also applies to the speculation that the ECB may be intending to overweight longer bond maturities within the framework of its reinvestment policy. Admittedly, it could well be the case that the ECB may find it necessary to purchase a larger volume of longer-dated bonds in order to counteract the natural decline in the overall portfolio’s residual maturity. It can be supposed that the resulting demand will probably be mopped up in part by corresponding new issues from European financial agencies. The most likely flexibilisation measure involves loosening the existing rule regarding the period of time within which maturing securities have to be reinvested. Extending this period would help to offset approaching redemption peaks and, in turn, demand peaks.
The stock effect relating to the ECB’s balance sheet remains the central factor influencing bond yields and risk premiums. This stock effect is the correlation between the cumulative volume of bonds purchased and held on the balance sheet, on the one hand, and the resulting change in yield levels and risk premiums, on the other. In view of the fact that the stock of bonds purchased by the Eurosystem is set to remain constant for the time being, the stock effect will presumably persist, acting as an obstacle to a distinct increase in risk premiums. Nevertheless, a marginal increase in risk premiums can still be expected, above all in the case of asset-backed securities (ABS), covered bonds and corporate bonds, because the Eurosystem has, in the past, been a particularly dominant force on the demand side in these particular segments.