‘Operation Twist’ is a bust
Speculation is rife that the European Central Bank will mimic the US Federal Reserve’s ‘Operation Twist’ from a few years ago, focusing reinvestments from redeeming bonds bought under the public sector purchase programme into long dated paper. While there has been some impact from the news, any benefit is likely to be limited.
A Reuters report outlining the plan late last week did spark some movement in eurozone government bonds. But given that the ECB is already near its limits on much of the investable public sector universe, even if it focuses on those countries with the biggest debt pile — and, in Italy’s case, the biggest need for support — any buying will need to be fed by increased long end issuance.
That may well be tempting for sovereign debt offices, allowing them to get some cheap long dated borrowing. But supply and demand still dictates that what the ECB gives in terms of borrowing costs, the extra volumes will swiftly take away.
The supply picture is even muddier for Italy, whose yields have suffered this year thanks to the elevation to power of a populist coalition that wants to cut taxes and boost spending. If that government gets its way, then no amount of ECB wizardry will dampen the rising costs that would follow a large rise in what is already Europe’s biggest debt pile.
The ECB might well be trying to squeeze the last bit of good from PSPP before it ends later this year. But when the history books are written about the era of extraordinary monetary policy, Europe’s ‘Operation Twist’ will be little more than a footnote.