LONDON - High-grade euro zone debt remains scarce even though the European Central Bank has stopped its huge purchases of new bonds, intensifying concerns that banks will face future collateral shortages and highlighting the need for safe assets.
That would boost the amount of risk-free securities in circulation but is disliked by Germany and other countries, who see it as a back door to mutualizing debt obligations among member states with vastly different debt burdens. Investors’ scramble for top-rated assets can have damaging consequences. For one, unnaturally low yields distort the bond market’s capacity to act as a signaling tool on the economy. Another worry is the possibility of a squeeze on repo markets, where this debt is used as collateral by banks and businesses trying to raise cash.
With ECB bond-buying, or QE, at an end, German five-year debt yields should be about 44 basis points above current levels of minus 0.31 percent, according to Richard McGuire, Rabobank’s head of fixed income.“That means the loss of demand ... has been perfectly offset by investors looking for safety,” he added.