short vs. long-term investments - what will capital markets deliver? · 2017-11-23 · short vs....

Short vs. Long-term

investments - What will capital

markets deliver?

An ECB Market Operations

perspective

ECMI, 23 November 2017

Brussels

ECB - public

Ulrich Bindseil

DG Market Operations

ECB

(Views expressed in this

presentation are not

necessarily the ones of

the ECB)

ECB Public

Rubric

www.ecb.europa.eu © 2

The maturity and liquidity transformation problem

Q2, 2017 In trillion of EUR

HH NFCs Publ sect Fin Corp Total

Assets 55 40 13 77 186

Financial assets 23 23 5 77 128

Real assets 32 17 8 1 58

Financial Liabilities 7 33 13 75 128

Net worth 48 8 1 2 58

(Net financial position ROW: 0.4 billion liability)

• Euro area: EUR 58 trillion of real assets; EUR 33 billion are financed

• Financial assets = financial liabilities = EUR 128 trillion

Rubric

www.ecb.europa.eu ©

Real assets in economic projects are illiquid and depreciate over many years: The real

sectors, in particular NFCs (also governments; households as mortgage borrowers)

want to run only a limited duration mismatch and take only limited liquidity risks.

Household want to hold (besides their pension savings) assets which are liquid and

have little (ideally no) market and liquidity risks.

The financial system aims at delivering required transformation:

– Pension/insurance: offer products with high long-term expected return, low risk

– Banks deliver maturity and liquidity transformation

– Capital markets aim at (long term) transparent and liquid funding instruments

Delivering financial transformation is risky => Regulation wants to reduce systemic

risks, while not unduly preventing maturity/liquidity transformation at benefit of society.

• Importance of efficient capital markets to:

– Realise growth potential of the euro area economy;

– Contribute to financial sustainability

– Foster diversity of founding opportunities for corporates;

– Provide attractive financial investments

– Support transmission of monetary policy

3

The maturity and liquidity transformation problem

Rubric


• Asset and funding liquidity are essential in determining the

ability of the financial system to intermediate and to provide

liquidity and maturity transformation

• CB collateral framework and way banks can access central

bank credit is important to asset and funding liquidity;

• Asset purchase programme, if in place, will impact on asset

price behaviour and liquidity. By exchanging long duration,

imperfectly liquid and somewhat credit risky assets against

risk free and perfectly liquid ones, it cheapens funding of real

economy and stimulates (long term) investment

• If implemented unfavourably, central bank operations could

however also distort markets, create volatility, impair liquidity

4

ECB market operations perspective

The role of efficient capital markets – an ECB perspective

Rubric


• Eurosystem collateral framework allows banks to convert eligible

securities into central bank money and has played a key role

– protecting Eurosystem from losses

– in implementation of monetary policy since 1999, and

– in stabilising financial markets and institutions during financial crisis

• How the Eurosystem collateral framework has been designed with the aim

also to support the efficient functioning of financial markets is explained in:

• http://www.ecb.europa.eu/pub/pdf/scpops/ecb.op189.en.pdf

A model how central bank credit operations and the collateral framework

impact on ability of the banking system to undertake maturity

transformation, and what role asset liquidity plays, is explained further in:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3049792

5

The ECB collateral framework and its impact on capital markets…

http://www.ecb.europa.eu/pub/pdf/scpops/ecb.op189.en.pdf

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3049792

Rubric


Eligible and non-eligible capital market instruments

6

Source: ECB;

Universe of eligible marketable assets as of 31 October 2017

Hybrid debt includes convertible bonds, contingent convertible bonds and bonds with warrants attached.

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

ABS Central/Reg.Government

CorporateBonds

Covered BankBonds

UncoveredBank Bonds

Hybrid Debt Equity Funds

Eligible and non eligible marketable assets issued by euro area issuers (EUR million)

Eligible assets (NVO) Non eligible assets (NVO)

Rubric


• APP (“QE”) a non-conventional monetary policy tool activated

to achieve price stability mandate in a context of:– Short term interest rates (the standard monetary policy tool) constrained

by effective lower bound to interest rates;

– Low natural interest rates (“low r*”) due to low potential growth and debt

overhang issues from financial crisis that are only gradually repaired.

• Without forceful easing measures (APP, TLTRO, NIRP),

(expected) inflation was expected to decine further, implying

risk ineffectiveness of monetary policy

• Eurosystem was successful in preventing this

• For more than three years: growth > potential growth =>

output gap closing; downward trend of inflation reversed;

unemployment falling; debt overhang issues gradually

addressed

7

The role of the Eurosystem asset purchase program

Rubric


ABSPP CBPP3 CSPP

Objectives /

motivation

• provide credit to real economy;

• help lenders diversify funding

• Contribute to revitalisation of a

sustainable securitisation in

euro area

• facilitate credit provision by

banks to the real economy

• support financing conditions

in the euro area

• strengthen pass-through of

Eurosystem’s APP to financing

conditions of real economy;

• provide further monetary policy

accommodation

Eligible UniverseMon. pol. eligible ABS (subject to

DD assessment)

Mon. pol. eligible CBs for own

use & multi-cédulas

Non-financial and financial

corporate securities (excluding

unsecured bank bonds)

Minimum rating CQS3 CQS3 CQS3

Maturity All All 6 months – 30 years

Issue Limit 70%* 70%*/** 33%/70%*/**

Issuer limit No Yes** Yes*

Purchases1ary & 2ary

market

1ary & 2ary

market

1ary & 2ary market

(no 1ary for public sector

corporates)

Implementation 6 NCBs NCBs and ECB 6 NCBs

Securities lending Authorised Yes Yes

8

* Specific conditions for programme countries apply

** Combined Eurosystem holdings from monetary policy and investment portfolios

Experience of the private sector parts of the APP

Rubric


Development of APP purchases

9

ECB-CONFIDENTIAL

Source: ECB

*Note: at amortised cost

Breakdown of total holdings as of 31 October 2017APP monthly net purchases by programme

Total holdings: €2,180 trn*

82%

11%

1% 6%

PSPP

CBPP3

ABSPP

CSPP

0

10

20

30

40

50

60

70

80

90

Oct

No

vD

ec

Jan

Feb

Ma

rA

pr

Ma

yJun

Jul

Aug

Sep

Oct

No

vD

ec

Jan

Feb

Ma

rA

pr

Ma

yJun

Jul

Aug

Sep

Oct

No

vD

ec

Jan

Feb

Ma

rA

pr

Ma

yJun

Jul

Aug

Sep

Oct

2014 2015 2016 2017

EUR bnPSPP CBPP3 ABSPP CSPP Average

Experience of the private sector parts of the APP: contribution to APP

Rubric


Experience of the private sector parts of the APP: Review

10

public

Since the start of the private sector purchase programmes, several positive

developments can be highlighted:

1. Broad based spread tightening….

CBPP3Announceme

nt

Start purchases

-50

0

50

100

150

200

Jan-1

4

Jun-1

4

No

v-1

4

Apr-

15

Sep-1

5

Feb

-16

Jul-1

6

De

c-1

6

Ma

y-1

7

Oct-

17

bps ES DE IT FR

Sources and notes: iBoxx indices. Last observation: 08 November

2017.

Covered bond asset swap spreads, per selected

jurisdiction ABS spread* developments

Sources: JP Morgan, Deutsche Bank Research and ECB calculations.

*Note: Most spreads are over 3-month Euribor. Rating at issuance.

Last observation: 10 November 2017.

0

50

100

150

200

250

300

350

400

Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17

NL IE ES-ECB elig.

IT-ECB elig. PT-ECB elig. Auto ABS

PT ES IT

ABSPP

announcement

Start of purchases

bps

Rubric



11

public

…. with spill overs to non-eligible fixed income securities

Sources and notes: ICE BAML EUR corporate bond index, ECB calculations.


Investment grade corporate bond z-spreads of CSPP

eligible and non-eligible bondsCorporate bond spreads in EUR denominated

investment grade vs high yield sector

0

50

100

150

200

250

Jan-1

6

Ma

r-1

6

Ma

y-1

6

Jul-1

6

Sep-1

6

No

v-1

6

Jan-1

7

Ma

r-1

7

Ma

y-1

7

Jul-1

7

Sep-1

7

No

v-1

7

z-spreadCSPP eligible CSPP ineligible

Start of purchases

CSPP announcement

Sources and notes: ICE BAML EUR corporate bond index, ECB calculations.


0

100

200

300

400

500

600

700

800

Jan-1

6

Ma

r-1

6

Ma

y-1

6

Jul-1

6

Sep-1

6

No

v-1

6

Jan-1

7

Ma

r-1

7

Ma

y-1

7

Jul-1

7

Sep-1

7

No

v-1

7

CSPP announcement

Start of purchases

EUR IG EUR HY

Rubric



12

public

2. Issuance remained healthy or even picked up…

0

20

40

60

80

100

120

2013 2014 2015 2016 2017 (YTD)

AT, BE, DE, FI, FR, NLES, IE, IT, PT

Covered bond issuance volumes

Source: Dealogic, ECB calculations. EUR-denominated benchmark size

primary market issuances. Last observation: 10 November 2017.

CBPP3

started in

Oct 2014

EUR bn

0

20

40

60

80

100

120

140

2013 2013 2014 2014 2015 2015 2016 2016 2017 2017

ES, IE, IT, PT, distributed BE, DE, FR, NL, distributed

ES, IE, IT, PT, retained BE, DE, FR, NL, retained

2015 2016 2017(YTD)20142013

Sources: JP Morgan and ECB calculation.


EUR bn

Asset-backed securities issuance volumes

ABSPP

started in

Nov 2014

Rubric



13

public

… however it is not yet evident that new or infrequent issuers are more

active these days

Corporate bond issuance volumes

CSPP

started in

Jun 2016

0

20

40

60

80

100

120

140

160

180

200

2013 2014 2015 2016 2017 (YTD)

EUR bn

Sources: Dealogic, ECB calculations. EUR-denominated, investment grade

primary market issuances. Last observation: 10 November 2017.

CSPP

started in

Jun 2016

0

5

10

15

20

25

30

35

40

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17*

EUR bn

Sources: Dealogic, ECB calculations. Data include all rated and non-rated euro

area non-financial companies issuing in euro. Last observation: 10 November 2017.

CSPP

started in

Jun 2016

Bond issuance by infrequent euro area non-financial

corporate bond issuers

Rubric



14

public

3. Liquidity picture is different across market segments

0

20

40

60

80

100

120

140

160

1 2 3 4 5 6 8 9

10

11

12

14

15

16

17

18

20

21

22

23

24

26

27

28

29

30

31

33

34

35

Index CSPP CBPP3 ABSPP

Development of the average trade size (Indexed to 100 at the beginning of each programme)

Rubric


Experience of the private sector parts of the APP: CSPP

15

public

Lessons learned from CSPP:

Keep flexibility at the heart of implementation by adapting purchases to market

conditions…

6.2 6.3 6.2

7.9 7.4 7.1

3.1

7.0 7.2 6.76.0 5.8 6.1

3.94.5

6.4 6.3

0.20.5 0.5

1.9

1.01.9

0.8

1.50.7

1.5

0.8

1.8

0.7

1.7

0.2

1.3

0.7

0

2

4

6

8

10

12

EUR bnSecondary market purchases Primary market purchases

Sources: ECB Staff Calculations. Last observation: 31 October 2017

Data refers to net purchases..

Rubric


Experience of the private sector parts of the APP: CSPP

16

public

Lessons learned from CSPP:

…and not aiming for a one to one replication of benchmark, rather keep market

neutrality as a key feature

0%

5%

10%

15%

20%

25%

30%

35%

40%

20172016201520142013201220112010<2010

CSPP-eligible bond universe CSPP holdings

Sources: ECB, Bloomberg. Distribution based on nominal amounts.


CSPP holdings according to the year of

issuance of the bonds

29% 32%

25%25%

11%12%

11%10%

6% 5%

11% 11%

7% 5%

0%

20%

40%

60%

80%

100%

holdings universe

FR

DE

IT

ES

NL

other (euro area)

other (non-euro area)

43%

45%

24%

21%

17%

17%

9% 9%

7% 8%

holdings universe

Infrastructure and comm.

Consumer

Industry and resources

Real estate and Insurance

Other sectors

10%

11%

41%

43%

49%

45%

holdings universe

AA

A

BBB

Country, sector and rating classification of CSPP holdings and CSPP-eligible bond universe

Sources: ECB, Bloomberg. Distribution based on nominal amounts.

CSPP holdings as of end of Q3 2017.

Rubric

www.ecb.europa.eu © 17

Experience of the private sector parts of the APP: CBPP3

Lessons learned from CBPP3:

Adapt purchases across time, including to primary market activity …

0

2

4

6

8

10

12

14

Oct-

14

Nov-1

4

Dec-1

4

Ja

n-1

5

Fe

b-1

5

Ma

r-15

Apr-

15

Ma

y-1

5

Ju

n-1

5

Ju

l-1

5

Aug

-15

Sep

-15

Oct-

15

Nov-1

5

Dec-1

5

Ja

n-1

6

Fe

b-1

6

Ma

r-16

Apr-

16

Ma

y-1

6

Ju

n-1

6

Ju

l-1

6

Aug

-16

Sep

-16

Oct-

16

Nov-1

6

Dec-1

6

Ja

n-1

7

Fe

b-1

7

Ma

r-17

Apr-

17

Ma

y-1

7

Ju

n-1

7

Ju

l-1

7

Aug

-17

Sep

-17

Oct-

17

EUR bnSecondary market purchases Primary market purchases

Sources : ECB. Purchases at amortised cost in EUR billion. Secondary market figures reported net of redemptions. Last observation 31 October 2017.

Data refers to net purchases.

public

Rubric


Experience of the private sector parts of the APP: ABSPP

18

public

0

5

10

15

20

25

30

No

v-1

4D

ec-1

4Jan-1

5F

eb

-15

Ma

r-1

5A

pr-

15

Ma

y-1

5Jun-1

5Jul-1

5A

ug-1

5S

ep-1

5O

ct-

15

No

v-1

5D

ec-1

5Jan-1

6F

eb

-16

Ma

r-1

6A

pr-

16

Ma

y-1

6Jun-1

6Jul-1

6A

ug-1

6S

ep-1

6O

ct-

16

No

v-1

6D

ec-1

6Jan-1

7F

eb

-17

Ma

r-1

7A

pr-

17

Ma

y-1

7Jun-1

7Jul-1

7A

ug-1

7S

ep-1

7O

ct-

17

EUR bnSecondary market holdings Primary market holdings

ABSPP – Cumulative net purchases* in

primary and secondary market

Sources : ECB website. End of month book value at amortised cost, in EUR

billion. Previous month's figures subject to revision. Figures reported net of

redemptions.

Lessons learned from ABSPP: Net purchases are increasing at slower pace due

to redemptions, leading to a higher share of primary market transactions

-20

-10

0

10

20

30

40

50

EUR bn

EU

R b

n

Gross purchases Redemptions Net purchases

ABSPP – Cumulative purchases and redemptions

Sources: Intex and ECB calculations.


Rubric


Experience of the private sector parts of the APP: ABSPP

19

public

Euro area ABS new issuance since the start of the programme

• EU ABS issuance remains at low levels, at about EUR 35 bn/year, but:

• good investor demand in recent issuances

• more broad-based issuance by jurisdictions and originators:• two Portuguese SME ABS and one Auto ABS

• broad-based issuance in Italy in terms of type of ABS, incl. RMBS and SME ABS

• some revitalisation in Spain, with some Auto ABS and RMBS

• consolidation/regular issuance in Netherlands (RMBS) and Germany (Auto ABS)

• first public RMBS issuances in Ireland & France since the financial crisis

• Final ABS regulatory framework on STS (simple, transparent and standardised)

and amended capital requirements regulation (CRR) voted in October 2017.

Legislation enter into force in Q1 2018; will apply Jan 2019 => Part of CMU

42%

3%

10%

2%

41%

2%

AUTOCREDIT CARDCONSUMERLEASINGRMBSSME

1%

31%

8%

2%12%

3%

13%

29%

1%

BEDEESFIFRIEITNLPT

Rubric



20

public

4. Evidence of easing in credit conditions

-5

0

5

10

15

20

25

30

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

loans to NFCs long-term debt issued by NFCs

Sources of financing for euro area non-financial companies (NFCs)

(y-o-y growth, %)

Source: ECB

Note: The data include debt issuance and loans denominated in euro to all euro area NFCs covered by the ECB securities statistics and statistics from MFIs

(monetary financing institutions). Last observation: September 2017.

Rubric


1) Key interest rates unchanged [“will remain at their present levels for an

extended period of time…”]

– MRO at 0.00%; MLF at 0.25%; DFR at -0.40%

2) APP will continue until end Sep 2018 [“or beyond, if necessary…”] at a

monthly pace of EUR 30 bn from January 2018

3) Reinvestment of the principal payments from maturing securities

purchased under the APP will continue after the end of net asset purchases

4) Private sector programs will remain “sizable”

5) Reinvestment modalities in net purchase phase: PSPP: same jurisdiction;

private sector programs: flexible

6) FRFA procedure extended for MRO and 3-month LTRO. At least until

the end of the last reserve maintenance period of 2019.

21

Latest ECB monetary policy decisions

Euro area monetary policy decisions at 26 October 2017 meeting ECB-UNRESTRICTED

Rubric


APP redemptions profile and reinvestment policy

• Projected APP redemptions

surpass EUR 100 bn in 2018;

ECB started publishing estimated

APP redemptions data over rolling

12-month horizon.

• Eurosystem will continue

reinvesting maturing securities

purchased under APP for extended

period of time after net purchases

=> absence of cliff effects

• Therefore, no particular volatility

expected looking forward relating to

APP path

• But of course factors causing

volatility in past may apply again

1. APP redemptions

22

0

5

10

15

20

25

EUR bn PSPP CSPP CBPP3 ABSPP

Projected redemptions

APP past and projected redemptions for 12 months

ECB-UNRESTRICTED

Source: ECB.

Realised redemptions

short vs. long-term investments - what will capital markets deliver? · 2017-11-23 · short vs....

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