I'm still getting a lot of questions on ECB QE and reinvestment after yesterday's spat ().
I've made this explainer with simple examples to show how monthly asset purchases can be affected by these technical issues. Bear with me. (1/n)
I've made this explainer with simple examples to show how monthly asset purchases can be affected by these technical issues. Bear with me. (1/n)
Bottom line: it's all technical but not that complicated in the end - reinvestments are creating huge volatility in monthly QE figures which are less relevant than before without smoothing averages. (2/n)
The @ecb is transparent: "Principal redemptions are reinvested by the Eurosystem in a flexible and timely manner in the month they fall due, on a best effort basis, or in the subsequent two months, if warranted by market liquidity conditions." ecb.europa.eu/mopo/implement… (3/n)
Back to my examples, with a caveat: I'm using stylised figures, close enough to reality, but we don't know the exact amount of redemptions by country. The purpose is to show how net asset purchases and PSPP shares can be affected by reinvestment. (4/n)
Case 1: €5bn German Bund redemption in April, all reinvested in the same month. Gross purchases increase, net purchases remain stable, no one else affected (all else equal). (5/n)
Case 2: the Bundesbank decides to spread the €5bn reinvestment over two months in equal proportion (to mitigate the market impact of larger gross purchases). Net German purchases *decrease* in April but *increase* in May (no redemption), affecting other countries. (6/n)
This is the key part: total net purchases have to remain broadly stable on average, so in that (extreme) case net purchases of Italy *and others* have to increase in April and decrease in May, based on ECB's "agreed and communicated" rules. (7/n)
Case 3: the Bundesbank decides to reinvest the €5bn over two months, but 85% in April and 15% in May. The numbers are starting to get closer to reality. In fact, the Bundesbank might have decided to spread large reinvestments over *three* months. (8/n)
Of course, the reality of QE implementation is more complex: 1) interaction between 19 juridictions, including reinvestment; 2) scarcity, or lack of bonds in small countries; 3) SMP and other legacy portfolios; 4) market conditions; etc. But I hope the examples helped! (9/9)
