ECB dilemma: ready to buy €60 bln of bonds, but there are not enough of them

The European Central Bank (ECB) plans to buy €60 billion of debt securities each month until September 2016, but some analysts and investors say it may struggle to find them.

In order to help revive the economy, the ECB has pledged to buy government bonds. But before, it has to find them.

Analysts and investors are estimating the central bank's chances and are being skeptical about them, though, given that many investors will be unwilling or unable to sell top-rated government bonds, particularly those belonging to Germany.

The ECB’s program of quantitative easing, or QE, due to start next month, involves buying €60 billion ($68 billion) of debt securities each month until September 2016. Since late last year, the central bank has been buying around €13 billion of other assets a month, and analysts expect the difference - around €47 billion - to consist of government bonds.

The ECB buys the government bonds looking back at each country’s share of the European Union’s population and gross domestic product.

The problem is top-rated bonds are already in short supply - especially Germany’s, which make up the largest individual chunk of the program. German government debt, or bunds, will account for just over a quarter of the purchases, or around €12 billion each month, says The Wall Street Journal.

Demand from investors has already sent yields on bunds tumbling. On Wednesday the yield on 10-year German government bonds was about 0.32% compared with 1.69% a year ago. Yields fall as prices rise.

As ECB President Mario Draghi said the ECB would consider buying negative-yielding debt, Germany sold five-year debt at a negative yield for the first time on Wednesday.

“There is already a huge shortage of German bonds in the market,” said Philipp de Cassan, head of euro core rates trading at Nomura. “We’re already seeing the symptoms of an ECB buying program.”

Anke Richter, head of European credit research at Conning, a U.S.-based asset manager with around $90 billion in assets, notes that some client portfolios will have guidelines dictating that government bonds must account for a certain proportion of their investments.

Other investors may not agree to sell top-rated government bonds because there is a lack of attractive alternatives. According to JPMorgan Chase, around a quarter of euro-area government debt now has negative yields, meaning investors effectively pay to hold these assets.

Anthony O’Brien, Morgan Stanley's co-head of European rates strategy, said the ECB could loosen a self-imposed restriction not to own more than 25% of any single bond, aimed at ensuring the central bank doesn’t hold a stake large enough to block a debt restructuring. The bank could also consider increasing purchases of bonds belonging to government agencies, such as German development bank KfW, instead of government debt.

Many economists agree though that the ECB will find it easier to buy other government bonds such as those belonging to Spain and Italy, which should make up 17% and 13% of the program, respectively. Further demand for 10-year German government bonds will push yields even lower which is exactly what the ECB wants to achieve to get more cash flowing around the system.