ECB could run out of eligible bunds if it hikes asset purchase

The European Central Bank (ECB) could soon be running out of eligible bunds to add to its purchase portfolio. It could also be said that European Central Bank (ECB) is already running out of options to add bunds to its portfolio without making a loss.

As of now, bund yields up to 10 year are now trading in negative and 30-year bund is trading at a yield of 0.49 percent. In terms of value almost 75 percent of all available bunds are trading at negative yield. So ECB is likely to be making losses on its purchases. In addition to that, almost 50 percent of all bunds are trading below ECB’s deposit rates. Yields are below deposit rates up to eight years. Soon ECB will have to venture into much longer dated bunds, so-called 30-year which would surely extend the duration of the ECB portfolio.

Without a change in the structure of the Public Sector Purchase Program (PSPP), it would be difficult for the European Central Bank (ECB) to increase its purchase pace as eligible bunds are likely to be exhausted by the end of next year.