Quantitative operations by the ECB in Europe
Assets & flows
QE/QT impact on bond supply
QE/QT influence on bonds
Insights
CONCEPT
We monitor here (1) the evolution of the ECB balance sheet with its weekly QE | QT flows, (2) the impact on stock prices and bond yields, and also (3) on available bond supply (monthly). In fact, Quantitative operations are an additional policy lever in the ECB's hands to regulate the financial system. The ECB can buy or sell large amounts of financial assets - most commonly government bonds - in the open market to add liquidity to markets or remove it. Buying is nicknamed as QE (Quantitative Easing), selling as QT (Quantitative Tightening).
CURRENT READINGS
- The ECB currently holds EUR 3.5trn in financial assets on its balance sheet. It just removed 24.7bn EUR liquidity from markets last week by selling/letting mature bonds it owned. In light of this, net bond supply available to investors keeps trending upward - EU bond yields are not currently supported by monetary policy.
MARKET IMPLICATIONS
The falling balance sheet of the ECB shows a 1-year correlation of -0.86 (strong) with rising 10Y German bond yields and of -0.85 (no relationship) with rising stocks in the Stoxx 600 index. This means that ongoing quantitative operations did VERY UNLIKELY influence stock prices and did VERY LIKELY influence bond yields.
In general, if the ECB buys bonds on the open market (by running QE) it injects liquidity in the system while reducing bond supply, pushing bond prices up, yields down. Such force ultimately eases monetary policy, reducing the cost of issuing debt for companies while increasing returns bond investors. If the ECB sells bonds on the open market - or let mature the ones it owns - (by running QT) it drains liquidity from the system while increasing bond supply, pushing bond prices down, yields up. Such force ultimately tightens monetary policy, increasing the cost of issuing debt for companies while reducing returns bond investors.