Just as the European Central Bank gets ready to reduce its bond-buying, this massive player in global markets is set to buy more.
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The extra buying, as the ECB reinvests the proceeds of maturing debt, creates a new dynamic for investors who have been more focused on when the central bank will begin reducing its EUR60 billion ($70.9 billion) a month of bond buying.
A signal of when that tapering will begin may come later Friday, when ECB President Mario Draghi speaks at the annual central bankers' jamboree at Jackson Hole.
The ECB began buying government bonds in March 2015 to help stimulate the local economy, boosting the price of debt and equity across the region. But now, eurozone growth is taking off and investors predict the ECB could taper its asset purchases as early as January 2018, having already reduced them from EUR80 billion a month in March.
But before that happens, the ECB's bond-buying will actually ramp up, analysts say. Bonds on its books are starting to mature, and reinvesting billions of euros worth of redemptions could support the bond market even as the ECB prepares to reduce the overall pace of its purchases, some investors say.
Investors are trying to work out where that reinvestment will go, a key question being asked of a buyer that has already scooped up EUR1.8 trillion-worth of sovereign and corporate debt, making it effectively one of the world's largest fund managers.
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"It adds to the inflow and is thereby even more supportive of European fixed income," said Charlie Diebel, head of rates at Aviva Investors.
In the last two weeks of July, EUR5.2 billion of bonds held by the ECB under its asset purchase program came due. Those proceeds have to be reinvested in new bonds, according to the ECB's own rules, in the same month the old bonds mature or in the following months "if needed."
Around EUR12 billion of bonds a month will need to be re-invested over the course of 2018, according to estimates from Bank of America Merrill Lynch.
The Federal Reserve has been reinvesting the proceeds of its so-called quantitative-easing, or QE, program since it stopped expanding its balance sheet in October 2014. Fed officials are now contemplating shrinking their bond holdings by scaling back reinvestments--a move economists think could come as soon as September. That reduction, along with rate rises, forms part of the Fed's efforts to unwind the extraordinary stimulus it unleashed following the financial crisis.
Richard McGuire, head of rates strategy at Rabobank, said the Fed's reinvestments are far more predictable. That is because, unlike the ECB, the Fed provided more details on how many bonds, and of what different maturities, it bought.
"The ECB is much more opaque," said Mr. McGuire.
That can make it tougher for investors to establish when and where the ECB's reinvestments will fall. Those who can may be able to benefit from the extra buying if it boosts certain securities and analysts are already starting to game where the reinvestments will go.
Rabobank points out that the EUR4 billion of ECB-held bonds that matured in the last week of July coincided with French bonds coming due, marking them out as a likely area of reinvestment.
Some investors say it is quite simple: the ECB has been spreading its purchases based on the relative size of the eurozone's economies. Just below a quarter of its EUR1.7 trillion of its public-sector debt purchases have come from Germany, so that country's debt should also see the biggest chunk of the reinvestments, some investors say.
Mr. Diebel said he closed a bet that German bonds would fall in value relative to U.S. bonds last week, in part because of the prospect of more ECB money flowing into German debt from reinvestments.
German yields jumped following positive comments from Mr. Draghi about the eurozone economy in late June. Yields rise as prices fall. Investors took his comments as a hint that the ECB was moving closer to trimming its bond purchases.
To be sure, despite the growing focus on reinvestments, many analysts still think tapering will continue to be the biggest question in European bond markets.
"They have to consider tapering sooner or later," said Mr. McGuire. "The market will take its cue from the pace of quantitative easing," he added.
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(END) Dow Jones Newswires
August 25, 2017 07:16 ET (11:16 GMT)