ECB likely to modify one or several parameters of the PSPP programme

The European Central Bank is considering changing of rules which would allow greater buys of peripheral paper. Present rules stipulate that euro­ area central banks can buy bonds sold by governments, agencies and European institutions in the secondary market that yield more than the ECB’s deposit rate, currently at minus 0.4 percent. Also, the current rules require the ECB to allocate purchases based on the size of a country's economy, which implies German debt is favored.

Risk-off following the outcome of the UK referendum has seen investors pile into safe assets like German debt which has caused a steep fall in German government bond yields. They are now negative with a maturity of up to 15 years. Current ECB rules make around 60 percent of Bunds ineligible for the public securities purchase programme (PSPP). The Bund scarcity is a problem for the QE implementation.

“It is more and more likely that the ECB has to modify one or several parameters of the PSPP programme. An increase in the issuer limit (from 33 percent to 50 percent) is possible but limited to sovereign bonds without CAC. It would not be sufficient especially if, as we forecast, QE is extended by 6 months. A deviation from the capital key and/or the removal of the deposit rate floor could become necessary,” said BNP Paribas in a report.