A massive programme of government bond purchases by euro zone central banks will get under way next month, with the Central Bank of Ireland set to buy around €700 million per month of Irish bonds.
The €1.1 trillion quantitative easing programme, announced in January, is likely to commence after next Thursday’s ECB council meeting.
It is expected that over the period of the programme, which lasts until at least September 2016, the Irish Central Bank and the ECB will buy up to €13 billion of Irish bonds.
The imminent move by the ECB has led to an extraordinary surge in bond prices. Irish 10-year bond yields fell as low as 0.85 per cent during the week and were just over 0.9 per cent yesterday. Bonds in other euro zone countries have also advanced strongly .
Limits set by the ECB on the amount of bonds that can be held by central banks are not expected to block purchases by the Irish Central Bank.
30 years
This is because €19 billion of the €25 billion in Irish bonds held by the Irish Central bank will not mature for over 30 years and thus fall outside the scope of the plan.
Further Irish bonds are held by the ECB, but it is believed that the totals involved will not limit buying of Irish bonds .
The purchasing programme covers bonds with a maturity of at least two years and a maximum of 30 years. The bonds cannot be brought directly from government debt-issuing agencies such as the NTMA, but it is not yet clear what gap must be left after issue before the central banks purchase.
The bonds will be bought at all maturities within the allowed two to 30-year limit.
Questions have been raised about how easy it will be for the central banks to purchase the bonds, given the limited supply in some markets. Around €1 billion of Irish bonds are traded each day on the market.
The Irish Central Bank will buy the bonds on the instruction of the ECB – a small percentage more will be bought by the ECB directly.
The programme should support bond prices and keep interest rates low, and is designed to also push banks and investors to place cash into the real economy.
New cash
Low bond yields should also lower the costs to the NTMA of raising new cash on the market.
The programme will also give a budget boost to Minister for Finance Michael Noonan as much of the interest payments to the Irish Central Bank on the bonds will flow back to the exchequer, which gets an 80 per cent share of Central Bank profits.
