Corporate-Bond Liquidity at Risk as ECB Seen Entering Market

  • Airbus, Volkswagen Notes Could Join Bond-Buying List, BNP Says
  • Central Bank Holding Onto Bonds May Exacerbate Trading Slump

The European Central Bank’s addition of three listed companies’ notes to a bond-buying program has sparked concerns about how far it may push into the corporate-bond market and the impact this would have on already tight liquidity.

The inclusion of the listed companies, all Italian utilities less than 30 percent state owned, may mark a first step toward buying bonds from any government-backed company, BNP Paribas SA analysts wrote in a note. That may open as much as 157 billion euros ($174 billion) of securities outstanding to potential ECB buying, including notes from Volkswagen AG, Airbus Group SE and Telekom Austria AG, they said.

“Let’s hope the ECB leaves its additions here, but there are plenty more companies that seem to tick its latest box for inclusion,” said Jeroen Van Den Broek, the head of developed-markets credit strategy and research at ING Bank NV in Amsterdam. “With the ECB buying up what little liquidity there is left in euro-zone investment-grade corporates, it pushes real money managers even further down the curve.”

Trading Slump

Liquidity has already plunged in the corporate-bond market, with trading tumbling about 90 percent since 2006, according to Royal Bank of Scotland Group Plc. That slump, predominately caused by banks cutting holdings to preserve capital in response to tougher capital rules, has prompted the Bank for International Settlements to warn about liquidity traps.

The ECB’s entrance into the market could worsen the squeeze, given its history of building and holding positions in the covered bond and asset-backed securities market. The lender is pursuing a 1.1 trillion euro quantitative easing program, which also includes buying sovereign and agency bonds, as it seeks to boost lending and growth in the euro area.

The central bank didn’t say it was buying corporate bonds in Thursday’s update. Rather, it included the three listed companies, Snam SpA, Enel SpA and Terna Rete Elettrica Nazionale SpA, among 13 new “agencies” added to its potential bond-buying list. The other 10 were unlisted entities, such as Austrian railway builder OeBB Infrastruktur AG and French train operator SNCF Reseau.

The program only covers corporate issuers governed by public law or controlled by the public sector, an ECB spokesman said. Private-sector securities aren’t eligible.

The list of borrowers may be amended “on the basis of monetary-policy considerations and duly reflecting risk-management issues,” according to the central bank’s website.

Finmeccanica, Air France

Government-backed utilities and infrastructure companies are the most likely to be seen as candidates for addition, Barclays Plc strategists wrote in a note. The BNP Paribas list of state-backed companies that could be added included Finmeccanica SpA, Air France-KLM and Electricite de France SA.

Volkswagen’s 3 percent notes maturing in July 2039 climbed one cent on the euro to 104.5 cents, according to data compiled by Bloomberg. That was the biggest gain in Bank of America Merrill Lynch’s Euro Non-Financial Index. EDF’s 750 million euros of 4.5 percent securities due in November 2040 were the second-biggest gainers, climbing 0.9 cents to 120.5 cents, the data show.

“It’s a positive sign that the ECB will be there with a bid,” said Jorgen Kjaersgaard, a London-based money manager at AllianceBernstein Ltd. which oversees $500 billion of assets globally. “It now makes it harder for people who are sourcing these bonds on the cheap, but on the positive side it should provide more stability.”

Building Positions

The ECB has bought 94.6 billion euros of covered notes since October and 8.6 billion euros of ABS since November, according to its website. The scale and pace of the purchases drove yields on covered bonds to record lows. In the ABS market, yield premiums slumped to the lowest since 2007.

The institution now holds about 15 percent of the 870 billion-euro market for covered notes, according to data compiled by HSBC Holdings Plc covering securities of 500 million euros or more. The share is 20 percent when bonds that don’t meet the ECB’s criteria for purchasing are excluded.

“The ECB is a big liquidity taker when it comes to trading activity in secondary markets,” said Zoso Davies, a credit strategist at Barclays in London. “If you look at what’s happened to covered bonds and asset-backed securities, we’ve seen a significant fall in activity in those markets. It would be pretty odd if credit didn’t react in the same way.”

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