Halister News

(Bloomberg) -- As the new marginal buyer of corporate credit risk, the ECB will be a near-term fillip for risk asset prices, but positive momentum could wane in coming months if full execution of CSPP proves challenging, Bloomberg strategist Simon Ballard writes.

• Spreads may maintain steady grind tighter as ECB corporate sector purchase program begins in June, although longer-term impact on spreads may be more modest
  • ECB hasn’t indicated size of planned purchases; If purchase volumes disappoint, spreads likely to pare early tightening, but if ECB manages to source full EU80b per month with strong corporate bond element, risk assets should rally further
  • Scarcity of primary and secondary paper may tighten spreads, be a limiting factor in size of ECB purchases
  • EUR IG cash index currently 65bps OAS mid, -8bps month- to-date; may still offer tightening potential to March 2015 low of 40bps
  • EUR HY cash index ~-10bps since ECB Thursday, ~-67bps mtd; Now 407bps OAS vs 206bps tight in May 2014
  • Any deluge of opportunistic corp new issuance, to capitalize on demand dynamic created by ECB balance sheet bid, could lead to investor indigestion and trigger medium-term profit-taking
  • Lingering questions about the technicalities and implementation of the program could also dent initial enthusiasm
• Still, CSPP details were broader and more inclusive than many investors expected, suggesting continued near-term momentum for corp spread performance as ECB now in direct competition with institutional and retail investors for corp credit assets
  • Crowding out likely to tighten spreads across quality curve in the short-term, beyond direct effect of actual purchases

• 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.