ECB: How much longer before it will no longer be able to let long-term interest rates rise? - Natixis

Patrick Artus, suggests that the ECB cannot push the long-term interest rate in the euro zone higher than the average long-term yield in bond portfolios.

Key Quotes

“If these two interest rates cross over:

• Savers would exit their existing life insurance contracts;
• Bond portfolios would present losses on the whole. 

The ECB must therefore exit quantitative easing and let long-term interest rates rise before this rise leads the interest rate to cross paths with the average portfolio yield. Given the current level of long-term interest rates in the euro zone, this will require interest rates to start rising at the latest in early 2018 (if the ECB looks at Germany) or early 2019 (if it looks at the euro zone as a whole).”

“The exit from quantitative easing will drive up long-term interest rates in the euro zone, as they started falling the moment quantitative easing was announced in the summer of 2014.”

“So the ECB must start exiting quantitative easing before the rise in long-term interest rates caused by this exit leads to higher long-term interest rates than the average long-term interest rate in bond portfolios.”

“Our econometric estimations show that an end to quantitative easing would drive up 10year interest rates in the euro zone by 130 basis points. So the ECB must stop quantitative easing before a 130 basis point rise in long-term interest rates would send them higher than the average long-term yield in bond portfolios.”

“Conclusion: The exit from quantitative easing will take place earlier 

The announcement or commencement of a gradual exit from quantitative easing could rapidly send long-term interest rates to a level that would be commensurate with a complete end to quantitative easing. If the ECB wants to prevent long-term interest rates from rising above the average long-term yield in portfolios, it will have to start (announce?) an exit from quantitative easing before the start of 2018.”