A growing scarcity of Bunds has been observable since the start of the ECB’s bond purchase programme (PSPP), attributable not only to shrinking supply but also to less issuance activity by the German Finance Agency as well as high demand. Above all, the ESCB has become a structural buyer of Bunds since the start of the PSPP. The ESCB not only meanwhile holds around one fourth of all PSPP-eligible Bunds (other EMU countries‘ shares are nowhere near as high), European central banks‘ demand is also price-inelastic, bolstering the market-distorting effect of the PSPP. Not only the ESCB exhibits strong demand for Bunds, non-EMU commercial and central banks without access to the ECB deposit facility invest in Schätze to maintain euro liquidity at the lowest possible risk.
The already-apparent scarcity of Bunds will continue not only until the end of the PSPP. As the ESCB reinvests all maturing bonds, the shortage will remain or even increase until the ECB decides to reduce its balance sheet. The Bund scarcity problem could also intensify further if the general yield level rises. Asset managers and insurers that have reduced their Bund holdings due to low yield levels over recent years might return to the market and compete increasingly with the ESCB.
The consequences of the Bund scarcity are already evident today in lower liquidity for Bunds and lower secondary market turnover. Moreover, the influence of the PSPP has led to a downward distortion of market yields. Furthermore, although the Bund shortage (which will not abate in the foreseeable future) might prove unable to prevent an economically-led general uplift in yields, it could potentially slow it considerably.