The QE figures for October showed the PSPP share fell sharply to 66% from 78% in September. The drop in the APP purchase rate from EUR30bn to EUR15bn was almost fully absorbed by the drop in PSPP of close to EUR14bn. However, as the seasonal issuance pattern tends to show a decline for CSPP and CBPP towards year-end, we expect the ratio to increase going towards year-end. Total APP and PSPP purchase volume was EUR15.0bn and EUR9.9bn, respectively.
Capital key deviation remained broadly unchanged - however with some additional purchases in Germany and slightly less in Spain. On the margin, Ireland also continued its 'reducing capital key deviation'-trend but only marginally. We expect this trend to continue, reducing some of the PSPP 'slack' from cumulative capital key deviation. The update of the capital key will, however, be an unknown factor for the sizeable reinvestments next year. The capital key will make cumulative deviations larger in France and Italy and Germany bought at par compared to capital key.
Looking ahead, the extra month of available PSPP redemptions indicates a large redemption in October 2019 . In October 2019: EUR29.0bn in PSPP and EUR31.6bn for APP in total, the highest to date and which is more than double the current purchase rate. That said, PSPP reinvestments are set to average EUR13.6bn 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 that the ECB expect spreads to develop based on issuance differentials when QE stops: ' expect that spreads are going to be affected depending only on the net issuance of different countries.' That also means that the ECB is ok with spread widening for certain countries.
The December ECB meeting will be very important for the future reinvestments. We expect the ECB to do another one of its dovish tightening manoeuvres and end APP net purchases officially and at the same time outline the reinvestment strategy, which includes a commitment to reinvest in full at least until summer 2020, and potentially longer. We also expect the capital key update to be announced then. 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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