We learned a few things on Wednesday about the European Central Bank’s plan to buy corporate bonds:
1) There’s no way it will be able to keep secret the identities of the companies whose bonds are bought.
2) Every purchase will push around prices for specific bonds.
3) This program is vastly different -- and much less stimulative in a broad sense -- from buying sovereign debt or other highly liquid assets.
The ECB embarked on its campaign to purchase investment-grade corporate debt to turbocharge its efforts to spur growth. It didn’t take long until Bloomberg reporters uncovered some specific, market-moving details: The bank was buying bonds of Anheuser-Busch InBev, Telefonica and Siemens, among others.
Not surprisingly, prices on those specific bonds rose. If a trader realizes what the European Whale wants to buy, why not ride the wave? The ECB is willing to pay high prices, so anyone who owns the bonds they want almost has an excellent chance of turning a profit.
This dynamic has influenced the European market so much already that it's pushed down some corporate-debt borrowing costs to record lows. Perversely, some company bond yields have turned negative, particularly for those companies whose debt is seen as a likely ECB target. It has been unheard of to pay a corporation to borrow money, and yet here we are.
The ECB's move has also contributed to a decline in U.S. corporate-debt yields, albeit not as much as in Europe.
So it's clear that the ECB's program is profoundly affecting credit-market values. But that's all worth it (perhaps) if it ignites growth and rescues the region from a deflationary spiral. So is it?
The initial signs indicate that it's probably not. This latest effort of corporate-bond buying, which has the ECB adding investment-grade corporate notes to its 80 billion euro monthly purchase program, hasn't lifted the agency's own longer-term inflation expectations at all. Earlier this month, the central bank released new euro-zone growth predictions that were lower in 2018 than its previous forecast.
It's also not fully achieving an ancillary goal of encouraging investors to lend to riskier companies. The gap between yields on euro-denominated investment-grade and high-yield bonds has narrowed but is still well above the lows of 2014.
While the ECB appears to be struggling to buy enough government debt of certain nations, that challenge is magnified significantly in the corporate-debt market. It has already caused significant distortions and will most likely continue to do so.
What remains to be seen is whether the European central bankers will achieve the stimulus they want. Early indications are not promising.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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