Next Stop on ECB QE Adventure: $980 Billion Corporate Debt

ECB's Draghi: Rates Will Stay Very Low for Long Time
  • Draghi to target investment-grade non-bank company bonds
  • Credit risk declines around the world after announcement

The next target for the European Central Bank’s expanding asset-purchase program: the region’s 900 billion-euro ($980 billion) corporate-bond market.

The ECB will buy investment-grade euro-denominated bonds issued by non-bank corporations established in the euro area, according to a press release on Thursday.

Corporate bonds are the latest assets to be added to a growing list of securities, from government debt to mortgage-backed notes, the central bank is snapping up to combat weak growth and inflation. Buying company securities may also demonstrate a greater tolerance for risk at the central bank as the notes are typically unsecured.

“This is no doubt a credit bazooka,” said Lyndon Man, a fund manager at Invesco Ltd., which manages $737.5 billion. “This is a big surprise. The market expected a broad expansion of bond buying to include further quasi-sovereign or agency bonds, so buying of non-financial corporates is significant.”

Credit risk fell around the world following the ECB announcement. The Markit iTraxx Europe Index of credit-default swaps on investment-grade companies dropped 8 basis points to 84 basis points, the lowest since Jan. 7, according to data compiled by Bloomberg. The Markit CDX North America Investment Grade Index dropped 4 basis points to 92 basis points, the lowest since Jan. 5.

The ECB has bought 786.8 billion euros of assets since October 2014. Government bonds have accounted for the largest portion of acquisitions, at 77 percent, while asset-backed securities account for less than 3 percent.

The Frankfurt-based ECB expanded its purchasing target to 80 billion euros a month starting in April, up from a current monthly rate of 60 billion euros, as Mario Draghi unleashed his most audacious stimulus package yet. The 25-member Governing Council, meeting in Frankfurt on Thursday, also cut the rate on cash parked overnight by banks by 10 basis points to minus 0.4 percent and lowered its benchmark rate to zero.

“He’s thrown everything he has at the market today,” said Gordon Shannon, a portfolio manager at TwentyFour Asset Management, which manages about 5.5 billion pounds ($7.8 billion). “It should be very supportive and get him ahead of the curve. But it’ll be very worrying if we don’t see much of a market reaction. He has no moves left.”

Liquidity Limits

The central bank has already dipped its toe into the water of corporate debt markets. Last year it added state-backed company bonds, including securities from Italian utility Enel SpA, to the list of assets eligible for purchase.

ECB purchases of company securities could serve to limit liquidity in a market where investors say it’s become harder to trade after banks cut their bond holdings to preserve capital in response to tougher rules.

There are roughly 560 billion euros of outstanding eligible corporate bonds available for the ECB to buy, according to Jeroen van den Broek, head of developed-markets credit strategy and research at ING Bank NV in Amsterdam.

“They’ll obviously be targeting the new-issue market because there’s so little liquidity in credit markets,” said van den Broek. “The market’s going to be squeezed.”

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