Failure of Bazookanomics – ECB QE

bond trader

The European Central Bank’s (ECB) monthly Quantitative Easing (QE) Programme prevents banks, pension funds, and insurance companies from accessing traditional low risk investments and forces them to take on more risk by buying lower quality investments.

This has a serious knock-on effect: the more risk we take with our money the more recklessly large firms will behave in our name and the more likely we are to lose everything.

This post seeks to explore some of the implications of ECB QE.

Why have 100 year government bonds recently started being issued?


The sudden flourishing of century bonds appears to be led by investors, with both Belgium and Ireland’s €100m, 100-year bonds arranged by Goldman Sachs and Nomura at the request of investors, with some suspecting the buyer is a single European insurer.

Funny how no-one knows who bought the bonds.

If you or your pension fund buy a 100 year bond for 2.3% like these Irish or Belgian Bonds then you’re heavily exposed to inflation and interest rate rises over the next 100 years.

This is sometimes referred to as Duration Risk:

The issue of negative interest rates is one of huge concern to the UK population. How do we pay for our future if the money we’re saving can’t even retain its current value?

It’s ok for large companies who can now borrow cheaply. But what about everyone else?

Maybe we should ask Larry Fink. This is taken from Robin Wigglesworth‘s piece on Negative Rates / Yields.

The swelling universe of negative yielding sovereign debt was dragging down yields globally, including in the US where negative central bank interest rates remain unlikely. That was keeping government and corporate borrowing costs subdued, but at the cost of savers and investors, Larry Fink, the head of BlackRock, recently said.

“There has been plenty of discussion about how the extended period of low interest rates has contributed to inflation in asset prices,” Mr Fink wrote in his latest annual letter to investors. “Not nearly enough attention has been paid to the toll these low rates — and now negative rates — are taking on the ability of investors to save and plan for the future.”

The following piece by Eric Platt looks at the data for negative yields and the psychology of investors looking for long term returns. There are fewer and fewer places for them to go. Either they have to lower their standards or lobby for longer bonds.

What are Central Banks doing about this? Are they bringing stability or making things worse?

The recent extension of the ECB’s QE programme to take in Corporate Bonds suggests the latter.

Whilst researching this article I discovered that the ECB had already been buying Volkswagen Bonds as part of its Asset Backed Security Purchase (ABS) Programme which started in November 2014.

The following City AM piece by Madeline Ratcliffe says :

The ECB started its asset-backed securities bond initiative last November, as part of efforts to be more transparent with investments.

I assume the piece is referring to the same ECB ABS purchase programme as referred to in the following Freedom of Information (FOI) Request.

I must admit I’ve seen no signs of any ECB efforts to be more transparent with investments.

As highlighted in their FOI response, current ECB policies are anything but transparent. The ECB’s PR team are well versed in the art of spouting nothing more than gobbledygook.

Perry Mehrling has pointed out that in reality a sense of mission creep has led to Central Banks becoming dealers of last resort.

If the ECB continues to fail to explain its ideas clearly then the time may come for it to have some new ones.

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