Today is a historic day for the corporate bond market: with the launch of the ECB’s CSPP, Mario Draghi is now directly buying European investment grade non-financial bonds. This means that no longer will European corporate bonds trade based on their fundamentals, but purely on expectations of frontrunning future ECB purchases. And to make the frontrunners’ lives easier, according to Bloomberg among the ECB’s purchases today were €3 million Engie bonds, Telecom Italia notes due in 2023 and 10-year Telefonica securities; the ECB also bought securities issued by Anheuser-Busch InBev NV, the world’s largest brewer; Telefonica SA, Spain’s former telecommunications monopoly; Siemens AG, Europe’s biggest engineering company; Assicurazioni Generali SpA, Italy’s top insurer; French automaker Renault SA and utilities Engie SA and RWE AG.
We expect their yields to tumble to even lower record lows in the coming days. Engie’s 300 million euros of notes maturing in 2111 rose as much 2.8 cents on the euro to the highest since April at 170 cents after it was reported that the French central bank bought the company’s bonds on behalf of the ECB.
RWE’s 600 million euros of notes due February 2033 rose 0.6 cents on the euro to 135.4 cents, the highest in four weeks, while Telefonica’s 1.35 billion euros of 10-year bonds rose to the highest on record, Bloomberg data show.
The ECB is targeting bonds with maturities of five years to eight years from chemical and real estate companies; six years to eight years for utilities; and two years to three years for auto firms.The ECB can choose from as many as 1,049 securities totaling 620 billion euros, according to data compiled by Bloomberg. CreditSights puts the size of the universe at about 628 billion euros, while Morgan Stanley estimates it is about 675 billion euros. The ECB will publish a list of its corporate bond holdings on July 18 and update it every Monday, according to the central bank.
As Regina Borromeo of Brandywine Global Investment Management said, “Draghi knows the ECB needed to come out with a big punch on the first day of its corporate purchase program to maintain credibility and confidence in his willingness to act.” And so he has: average yields for euro notes were down to 0.98% on Tuesday, the lowest in more than a year, according to Bank of America Merrill Lynch index data. The ECB’s intervention in the government bond market over the past year has pushed yields down to records, as pricing no longer reflects any fundamentals.
While the ECB having preannounced it would purchase these and other securities some three months ago, investors are watching for an indication of whether they were right to pile into investment-grade corporate bonds on the promise of ECB President Mario Draghi’s purchases.
Much is riding on the line for Draghi as a result of this unprecedented attempt to spur European inflation by way of encouraging stock buybacks, which is what the “logic”“There is a fair amount riding on this in terms of the ECB’s credibility,” said Victoria Whitehead, a Paris-based senior portfolio manager at BNP Paribas Investment Partners, which oversees about 521 billion euros. “The perception is that if they can’t buy at least 5 billion euros of bonds a month, the program will be seen as unsuccessful.” Of course, if buying IG bonds fails, there is always ETFs, REITs, and finally single name stocks before Draghi has to unleash the helicopter money.
While it is unclear how allowing European corporations to unleash a historic stock buyback spreed will do antyhing for the economy – after all this has been tried in the US for years without any positive impact – the ECB’s action is already having an impact on European bond supply. Anticipating a surge in demand, companies sold more than €50 billion of bonds in the single currency in May, the second-busiest month on record, according to data compiled by Bloomberg. Already some are worried that the ECB’s purchases, having been frontrun for the past three months, may not be enough: while buying of more than 5 billion euros of company bonds a month may boost the market, investors may be disappointed if the ECB bought less than 3 billion euros, CreditSights analysts wrote in a June 5 report. Commerzbank AG and Morgan Stanley don’t expect the monthly purchases to surpass 5 billion euros.
“We’re worried that they won’t be able to buy quite as much as they want to,” said Tim Winstone, a London-based portfolio manager at Henderson Global Investors Ltd. which oversees about 93 billion pounds ($135 billion) of assets. “If the buying underwhelms and reported volumes are less than most people expect, there is a risk of a selloff.”
And if there is anything central banks hate, it is the “risk of a selloff”, especially when the levitation was not the result of any fundamentals.
Which means that the ECB will gladly push its balance sheet to new record levels, because as the following BBG chart shows, the ECB is about to break its own record for total assets on the balance sheet after 20 months of buying bonds in a bid to revive the region’s economy. When the purchase program began in October 2014, its aim was to steer total assets back toward the previous peak level of €3.1 trillion reached at the height of Europe’s debt crisis in 2012.
Finally, putting the ECB’s mad scramble to monetize bonds, here it is in context with all other QE programs. The ECB is buying up the equivalent of 2.5x of the total net supply of government bonds issued in any one year. At this rate, it will have no choice but to purchase even more assets as it runs out of willing sellers.
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