A European Central Bank plan that seeks to keep government bond yields within a set band may be more successful than imposing a secret outright yield cap or target spread over German bonds, Rabobank said.
“The ECB could look to hold yields within a pre-defined band of reasonable width,” Utrecht, Netherlands-based Rabobank said in an e-mailed note today. “This could bring together the advantages of an outright cap but also have the benefit of allowing the ECB to reward or punish a country with regards to the implementation of its reform program.”
An outright, unannounced cap would require the ECB to buy more bonds in total as markets test for the central bank’s target yield, Rabobank said. A target spread over benchmark German bunds would be less effective as those securities would fall due to investors pulling money out of safe assets, it said.
The ECB is working to complete a design to help reduce government borrowing costs and win nations time to implement budget measures. While Spanish and Italian bond yields fell to the lowest in more than two months this week after Der Spiegel magazine reported the ECB was mulling yield caps, the Frankfurt- based central bank said on Aug. 20 that it hadn’t made any decisions yet.
In a separate note, Juergen Michels, managing director of Western European Economic Research at Citigroup Global Markets Ltd. in London, said ECB President Mario Draghi may seek to address market concerns over the central bank’s seniority in bond markets by restricting its future purchases to securities with a maturity of less than a year, which are typically exempt from debt restructuring.
“This would allow the ECB to claim that it will not have a seniority position to existing holders of bills, although the ECB de facto probably would gain a seniority position versus existing bond holders,” Michels said.
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