ECB participation in the Eurozone market is decreasing | Liberal


The reduced activity of the European Central Bank in the government market bonds of the Eurozone, following the cessation of reinvestment under the quantitative easing program APP, was quickly covered by other buyers, resulting in a smooth and seamless transition to a credit tightening regime.

According to her analysis ECB, with Title: “Who’s Buying Bonds Now? How markets reacted to the reduction of the Eurosystem’s balance sheet”, the ECB’s footprint in the Eurozone bond market is returning to 2020 levels, when it had launched its massive Pandemic Emergency Program (PEPP) bond purchases.

From mid-2022, the central bank’s balance sheet decreased by about 2 trillion euro or more than 22%, mainly due to the repayment of loans with zero or negative interest that the banks had received but also the non-reinvestment of capital from bond maturities.

In 2020, the total amount of outstanding Eurozone government bonds amounted to almost 8 trillion. euros, while the purchases by the ECB and the value of the government securities that the banks had given as collateral to receive the loans on favorable terms exceeded 3.5 trillion. euros and corresponded to 31.5% of the market. This figure rose to close to 40% in mid-2022, but has since started to decline and is approaching 2020 levels again, despite record bond issuance from Eurozone countries.

But how, Frthe market adjusted and which investors filled the gap left by the ECB’s policy change, absorbing rising government bond issuances? The figures show that it was foreign investors and Eurozone households that contributed mainly in this direction. Foreign investors have traditionally been the biggest buyers of Eurozone government bonds, with a share reaching 40% before the ECB began bond purchases in 2015. Their holdings then halved, only to rebound with higher purchases when the central bank’s reinvestment under the APP stopped.

THE return of foreign investors, mainly investment funds and hedge funds, explained by the increase in bond yields following the tightening of the ECB’s monetary policy from mid-2022 with its successive interest rate hikes.

Also notable is the return of households to the bond markets, which were the biggest buyers after foreign investors in 2023, with their share of the market rising to 3.5%, close to the pre-2015 level.

Rising bond yields, combined with special issuance by Eurozone countries and slow and limited increases in bank deposit rates, made government bonds attractive to households.

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