European Central Bank expands QE to include Covered Bonds

Global central bankers appear to be coordinating their actions closely.

Just hours following the reactivation of Bank of England’s QE, the European Central Bank (ECB) announced that they will be expanding their bond purchases to include Covered Bonds or debt securities backed by cash flows from 'cover pools' composed of mortgages or public sector loans

From Bloomberg, (bold emphasis mine)

European Central Bank President Jean- Claude Trichet, fronting a policy decision for the final time, said the ECB will resume covered-bond purchases and reintroduce year-long loans for banks as the sovereign debt crisis threatens to lock money markets.

The ECB will spend 40 billion euros ($53 billion) on covered bonds starting next month and will offer banks two additional unlimited loans of 12 and 13-month durations, Trichet said at a press conference in Berlin today after policy makers left the benchmark interest rate at 1.5 percent. He also said the ECB will continue to lend banks as much money as they need in its regular refinancing operations at least until July 2012.

The ECB is resisting calls to reverse its two rate increases this year even as the debt crisis threatens to tip Europe back into recession, turning instead to tools it has previously used in an effort to calm financial markets. With European leaders still hammering out a new plan to stop the region’s debt crisis, Trichet’s final decisions may be among the most critical for the future of the euro -- the currency he has championed as a symbol of European unity…

The ECB purchased 60 billion euros of covered bonds in a one-year program that expired in June last year and was aimed at freeing up banks’ balance sheets and encouraging lending during the region’s worst recession since World War II.

The 2.5 trillion-euro market for covered bonds -- assets backed by mortgages or public-sector loans -- underpins much of Europe’s real estate lending, which almost ground to a halt in the wake of Lehman Brothers Holdings Inc.’s collapse in September 2008.

“The new purchases will have the capacity to be conducted in the primary and secondary markets and will be carried out by means of direct purchases,” Trichet said. They will start in November “and are expected to be fully implemented by the end of October 2012,” he said.

Trichet said all the measures announced today are designed to improve transmission of the ECB’s monetary policy.

Will Ben Bernanke’s US Federal Reserve be next?