The QE figures for November showed the PSPP share stayed at the record low level of 66%. With the new purchase rate as of October this year, the PSPP has taken the full hit of the EUR15bn rate. For December, as the seasonal issuance pattern tends to show a decline for CSPP and CBPP towards year-end, we expect the ratio to increase. APP and PSPP purchase volume was EUR15.3bn and EUR10.1bn, respectively.
Capital key deviation remained broadly unchanged for most countries, however with some additional purchases in Spain and Finland. Today, we also received the updated capital key as of 1 January 2019. Uncertainty prevails if the new or old capital key will be used for reinvestments. However, the ECB is focused on not disrupting markets with this change. We believe the reinvestments should reflect the capital key at the given time; however, politics may interfere . As the chart on the right suggests, Italy would be markedly more overbought, while Germany under-bought with the new cap key.
Looking ahead, the extra month of available PSPP redemptions in November indicates a close to average redemption month in the next year . In November 2019; EUR13.0bn in PSPP and EUR16.4bn for APP in total, which is close to the current purchase rate. PSPP reinvestments are set to average EUR14.2bn during the next 12 months , and the reinvestments coming from the high stock of purchases will continue to contribute to the accommodative monetary policy stance.
Next year, DE and NL are expected to be net negative from an issuance / reinvestment point of view, while some countries will show positive supply of bonds in the market - net of QE reinvestment. At the October press conference, Draghi implied that the ECB expects spreads to develop based on issuance differentials when QE stops: 'e xpect that spreads are going to be affected depending only on the net issuance of different countries.' That also means that the ECB are ok with spread widening for certain countries.
The December ECB meeting in two weeks time will be very important for the future reinvestment strategy. We expect the ECB to make a dovish tightening move and end APP net purchases officially, while at the same time outline the reinvestment strategy, which could include a commitment to reinvest in full at least until summer 2020, and potentially longer. We expect the ECB to start a gradual balance sheet reduction in 2021 (2-3y after the end of the net asset purchases).
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