European Central Banks may be Stepping Up Bond Purchases

With peripheral European bond spreads under pressure, it is not surprising to hear more talk of purchases by European central banks. What is slightly different about the talk today is that:

1) The purchases are said to involve at least three peripheral countries, Portugal, Greece, and Ireland, usually the talk has focused on 1-2 countries.

2) The tenor seems a bit longer with 5-10 year bonds talked of having been bought vs 2-5 yrs.

Some report that some European central banks may have called dealers and inquired into prices, but haven't dealt. This alone influences psychology and there is something that Japanese officials should note in terms of tactics.

Purchases of sovereign European bonds has been in the 150-340 mln euros in recent weeks, well down from the 16.5 bln bought in the first week of this controversial program. Since early July it has not exceeded 1 bln euros.

The purchases are clearly not sufficient to blunt the selling pressure as the premium Portugal and Ireland had to pay earlier today over Germany was a record amount and the premium in Greece was the highest since before the EU/IMF package.

All told, the European central banks have purchased about 61 bln euros of sovereign bonds. We have argued that there seems to be a barrier near 80 bln euros, which is roughly the amount banks are willing to participate in the ECB's weekly offset, draining operation.

Also, note that yesterday, amidst the heightened concerns over the sovereign and bank funding challenges, the ECB drained 175.4 bln euros in a 1-day fine tuning operation at 0.8%. While the ECB has extended its emergency facilities into next year, its money market operations still appear a bit tight fisted and the bond purchases have been rather stingy.