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 Weeks before the European Central Bank begins a program to buy about
1 trillion euros of euro zone government bonds, banks, pension funds
and insurers across the continent are hoarding them for regulatory
or accounting reasons.
That may complicate implementation of the quantitative easing
program, aimed at reviving growth and inflation in the euro zone.
The ECB might have to pay way above market prices, or take
additional measures to encourage investors to sell.
"We prefer to hold on to them," said Antoine Lissowski, deputy CEO
at French insurer CNP Assurances. "The ECB's policy ... is reaching
its limits now."
Banks, which buy mainly short-term bonds, use government debt as a
liquidity buffer. Selling would force them to invest in other
assets, for which -- unlike government bonds -- regulators ask banks
to set cash aside as a precaution. Alternatively, they can deposit
money with the ECB, at a discouraging interest rate of minus 0.20
percent.
Insurers and pension funds typically buy long-term debt. They could
make hefty profits selling to the ECB. But the money would have to
be re-invested in other bonds whose yields would be much lower than
their long-term commitments to clients -- a regulatory no-no.
In 2012, many euro zone bonds offered double-digit yields. Today,
Greece aside, the bloc's highest yielding debt is a 30-year
Portuguese bond offering 3.30 percent.
Between a quarter and a third of the market carries negative yields,
meaning investors pay governments to park their money in debt. In
Belgium, a country whose rates are taken as indicative of the euro
zone average, benchmark 10-year bonds <BE10YT=TWEB> yield 0.7
percent, just above record lows around 0.5 percent.
"If we were to sell bonds, we would make huge capital gains, but we
will then have to reinvest that money at a yield of 0.5 percent, set
against liabilities at 3.50-3.75 (percent)," said Bart de Smet, the
CEO of Belgian insurer Ageas.
Dutch banks ING and Rabobank, Spain's Bankinter and rescued lender
Bankia and France's BNP Paribas said they were unlikely to
sell when the ECB comes knocking.
"The volume of sovereign bonds we own at the moment is not linked to
monetary policy," BNP Paribas deputy CEO Philippe Bordenave said.
"It's linked to the regulation."
If Greece were to leave the euro, selling pressure might increase,
but Grexit is seen as an outside risk.
BIG HOLDERS
Banks are big holders of government bonds, especially in the more
indebted states that most need ECB support. In Spain and Italy, they
own a quarter of the market, or around 600 billion euros combined on
a net basis. In Germany, banks own over 250 billion euros of public
debt.
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UBS estimates local pension funds, insurers and mutual funds own 20
to 25 percent of the domestic government bond market in Belgium,
Italy and the Netherlands.
One of the Swiss bank's rate strategists, Nishay Patel, says this
hoarding is likely to force the ECB to buy more bonds maturing in 5
to 10 years to meet its trillion euro target.
He calculates that if 45 percent of the ECB's purchases are in that
sector, 35 percent in shorter maturities and 20 percent in longer
ones, the ECB would be able to stay below its self-imposed cap of
not owning more than a quarter of any one bond.
Holders of 5- to 10-year debt are likely to be hedge funds or other
asset managers that bought government bonds in anticipation of the
ECB entering the market.
"The ECB have a lot of flexibility in the sense that they haven't
disclosed what amounts they would buy in certain segments of the
curve," Patel said.
If the ECB gets desperate, some analysts say, it could raise its
deposit rate to zero to encourage banks to sell.
Regulation and central bank purchases, along with efforts by
indebted governments to reduce issuance, are among the reasons
global demand for bonds is almost $700 billion above supply,
according to a JPMorgan estimate.
But everything has a price. RBS strategists see a 40 percent chance
that ECB purchases would help turn German 10-year Bund yields
negative this year.
"There's a lack of bonds to meet current demand globally, so it's
going to be difficult to see a lot of sellers," said Patrick
O'Donnell, portfolio manager at Aberdeen Asset Management, who does
not plan to sell.
"The risk is that if the ECB is serious about buying at the rate of
60 billion a month, the price impact could be quite material."
(Reporting by Carolyn Cohn, Nishant Kumar and Marius Zaharia in
London, Leigh Thomas in Paris, Jesus Aguado in Madrid, Toby Sterling
in Amsterdam and Jonathan Gould in Frankfurt; Writing by Marius
Zaharia; Editing by Nigel Stephenson, Larry King)
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