Monday 23 October 2017

ECB corporate bond buys start on a strong note

ECB president Mario Draghi delivers his hard-hitting speech to the Brussels Economic Forum
ECB president Mario Draghi delivers his hard-hitting speech to the Brussels Economic Forum

The European Central Bank bought €348m worth of corporate bonds in the first day of such purchases last week, it said on Monday, as part of its €1.74 trillion scheme to revive growth and inflation.

The figure is well above the upper end of analyst predictions, indicating a strong start for the programme and suggesting that the ECB was keen to show it can buy significant volumes.

The ECB added investment grade, non-bank corporate bonds to its asset-buying programme from June 8 to make borrowing cheaper, induce companies to spend and lift a sluggish euro zone economy, which is recovery only slowly from a debt crisis.

Corporate borrowing costs have declined sharply since the start of the year, particularly on the edges of the 19-member euro zone, with the start of ECB buys giving the markets another push.

"Note that there was no 'buying the rumour, selling the fact' syndrome: the tightening in credits since the announcement continued after they began hitting the market," said Erik Nielsen, Group Chief Economist at UniCredit.

Nielsen said interest rates, particularly for small and medium-sized firms in the euro zone's periphery, have dropped sharply, with loans in Italy for up to five years costing roughly the same as in Germany, down from a spread of 130-140 basis points two years ago.

Investment grade, non-financial euro zone corporate debt was yielding 1.113 at the end of last week, well below levels around 1.6pc when the programme was announced in March and marginally below the 1.155pc seen just before the beginning of actual purchases.

"It seems the corporate bond market remains relatively unaffected from what's happening in other markets due to the prospects of the ECB buying," ING said, referring to big stock market falls on Friday and Monday.

The ECB was seen in the market buying a wide range of corporate debt, including from Italian insurer Generali , Spain's Telefonica and French utility Engie .

ECB sources earlier said that buying is likely to start slow and small, possibly struggling to pick up speed during the summer months as liquidity tends to fall sharply during the peak holiday periods.

But the purchases under the ECB's €80bn per month asset-buying programme could then rise to around the €2bn to €3bn per month and possibly over 5bn if the ECB succeeds in getting companies to start issuing new debt, analysts say.

The key hurdle is that the market for investment-grade euro-denominated corporate bonds is worth €500bn to €600bn and tends to be dominated by big French and Dutch companies who already enjoy easy access to credit and may not need ECB cash.

For purchase volumes to ramp up, the ECB will need to get new issuers from the periphery, like Italy or Spain to start borrowing, issuing new debt, giving the ECB to buy bigger chunks in the primary market.

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