further rate cuts and lowered the deposit rate to Exhibit 90: European Government Bond Issuance -0.40%. Second, it increased the size of its asset and ECB Purchases purchase program from €60 billion to €80 billion ECB buying is outpacing net issuance of Eurozone bonds. per month, effectively buying more Eurozone bonds each year than are actually issued (see ei Exhibit 90). Finally, it continued to limit its buying 99) Net suanoe ECB Purchases ¢ Net lsuance ncuting ECB Purchases to bonds with yields above the deposit rate, which concentrated its purchases toward long- m maturity bonds. od These measures created an extreme scarcity effect in long-term German bunds, as investors sor 4 scrambled to buy today for fear of even lower 300 interest rates tomorrow. In response, German -400 -386 10-year rates fell to an all-time low of -18 basis points in July of 2016. During these same summer _—_—800 months, all German government bonds with less than a 15-year maturity offered negative yields. eM 2016 2017 However, monetary policy does not operate in vata as of December 31,2016 a vacuum. With negative interest rates impairing Source: Investment Strategy Group, JP Morgan. the profitability of the European banking system, the ECB has already begun to alter its policy mix. At its December 2016 meeting, the ECB reversed investors. After all, just a 2 basis point increase in the increase in asset purchases mentioned above, German 10-year bund yields generates a capital targeting €60 billion per month for the upcoming loss sufficient to offset an entire year of income. March—December 2017 period. Moreover, it lifted | That said, we should not confuse an underweight the restriction on purchasing bonds with yields with a zero weighting, as European clients should below the deposit rate, alleviating the scarcity retain some exposure to German bunds and other premium attached to long-maturity bonds meeting _ high-quality Eurozone bonds in the “sleep-well” this criterion. While