EU Credit Returns May Depend on What the ECB Buys: Analysis
(Bloomberg) -- ECB’s plan to add corporate bonds as of end-2Q to securities eligible for its purchases is supporting risk appetite across these assets but not all bonds will be favored equally, Bloomberg strategist Simon Ballard writes.
- Even as a rising tide may lift all ships in the short term, limited corporate bond market liquidity suggests ECB buying may eventually be biased toward certain rating brackets
- Analysis of liquidity of outstanding corporate bonds by credit rating category suggests BBB rating bracket may be key beneficiary of ECB buying as it offers deepest potential liquidity across outstanding IG, EUR corporate bond universe
- Total outstanding bonds by rating category; ‘A’ ~EU940b, ‘AA’ ~EU1.4t, ‘BBB’ ~EU1.9t, according to Bloomberg data, using SRCH function
- But possible crowding-out effect may buoy broader asset class, as investors try to pre-empt the central bank and its new “marginal buyer of corporate bonds” status; ECB buying could be strong technical across broad corporate bond space, both IG and HY
- More precise details of ECB’s proposed Corporate Sector Purchase Programme (CSPP) may still be several weeks away; has thus far only given broad parameters of proposed CSPP, will target IG EUR-denominated bonds issued by non-bank corporations established in the euro area
- Treatment of senior vs sub debt, primary vs secondary, split ratings and fallen angel risk, issuer and issue concentration limits, all still need to be clarified
- Implicit ECB backstop bid may help to limit spread widening pressure from future macro or geopolitical concerns, even if justification of program in first place still questionable
- Corporate bond mkt has been functioning well in recent months in terms of financing transmission mechanism; was not in specific need of central bank intervention; CSPP won’t directly generate economic growth or create consumption/inflation
- Primary vs secondary? Questions may arise over legality of ECB buying via primary mkt if seen as direct financing of individual corporate issuers
- NOTE: March 10 2016; ECB announced addition of CSPP to the Asset Purchase Programme (APP)
- NOTE: Simon Ballard is a credit strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.
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