Draghi Fires Starting Gun on Corporate Bond Purchases in Europe

Will Draghi's Bond Buying Push the Euro Lower?
  • Engie, Telefonica, Generali bonds among those bought by ECB
  • Central bank also bought AB InBev, Siemens, Renault notes

The European Central Bank entered new territory in its efforts to stimulate the euro region’s flagging economy, plunging into the corporate bond market on Wednesday and buying the debt of some of the continent’s biggest companies.

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Purchases included 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; Telecom Italia SpA; French automaker Renault SA and utilities Engie SA and RWE AG, according to people familiar with the matter, who aren’t authorized to speak about it and asked not to be identified.

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. Average yields for euro notes were down to 0.98 percent 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.

“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,” said Regina Borromeo, a London-based money manager at Brandywine Global Investment Management, which oversees $70 billion of assets.

The ECB is adding investment-grade corporate notes to its 80 billion-euro monthly purchase program, which already includes covered bonds, asset-backed securities and sovereign debt, as part of efforts to encourage growth. The central bank has bought more than 800 billion euros of government bonds since March 2015.

“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.”

ECB purchases today included 3 million euros of Engie bonds, Telecom Italia notes due in 2023 and 10-year Telefonica securities, the people familiar with the transactions said. The central bank 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 people said.

Bonds Rise

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.

Anticipating a surge in demand, companies sold more than 50 billion euros of bonds in the single currency in May, the second-busiest month on record, according to data compiled by Bloomberg.

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.”

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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.

Euro-area national central banks will buy notes on behalf of the ECB in primary and secondary markets, according to the ECB’s website. Bonds issued by non-bank companies with an investment grade from at least one ratings provider will be eligible. The French central bank has the widest choice of bonds to buy, with a third of the eligible notes falling under its remit, followed by Germany, Belgium and Spain, according to data compiled by Bloomberg.

The ECB will publish a list of its corporate bond holdings on July 18 and update it every Monday, according to the central bank.

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Investors have previously been disappointed by other parts of the ECB’s bond-buying program. Securitized debt surged to the highest in more than seven years when the central bank announced plans to start buying asset-backed securities in 2014. They soon declined when purchases failed to meet expectations. Since the central bank started buying the notes in November 2014, it has accumulated just 19 billion euros of them.

“So much depends on the sizes of the purchases, which the ECB has been vague about on purpose,” said Juan Esteban Valencia, a credit strategist at Societe Generale SA in Paris. “They might still be figuring out their approach.”

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