ECB Reaches Down Rating Scale in First Corporate Bond Purchases

  • Central bank said to buy Telecom Italia notes on Wednesday
  • Notes ranked as sub-investment grade by Moody’s, S&P

The European Central Bank didn’t shy away from the region’s riskier securities when it began buying corporate bonds on Wednesday.

Purchases included notes from Telecom Italia SpA, according to people familiar with the matter, even though Italy’s biggest phone company is rated as sub-investment grade by two ratings firms. The company’s bonds are in Bank of America Merrill Lynch’s Euro High Yield Index and credit-default swaps insuring the notes against losses are part of the Markit iTraxx Crossover Index linked to companies with mostly junk ratings.

Mario Draghi is showing he’s planning to make the biggest impact possible on the first day of corporate bond purchases by casting his net as wide as the program allows. While the ECB has said it would buy corporate bonds with a single investment-grade rating, some investors expected the central bank to start with the region’s highest-rated securities.

“This dispels any doubts investors may have had about the commitment of the ECB and the central banks to tackle lower-rated names,” said Alex Eventon, a Paris-based fund manager at Oddo Meriten Asset Management which oversees 46 billion euros ($52 billion) of assets. “Telecom Italia is firmly at the weak end of the spectrum the ECB can buy. It’s good for high-yield investors who might have bought these bonds to ride the rally the ECB created.”

Yields Tumble

Investors have snapped up investment-grade corporate bonds on the promise of central bank purchases, driving up prices and cutting borrowing costs. The average yield for euro notes tumbled to 0.98 percent on Tuesday, the lowest in more than a year, according to Bank of America Merrill Lynch index data. Junk bonds have also rallied, with the average yield falling to a one-year low at 4.64 percent, the index data show.

Telecom Italia’s bonds, which are ranked at the lowest investment grade by Fitch Ratings, have rallied along with other company securities since the ECB first announced it would buy corporate notes in March. The yield on its 1 billion euros of bonds due in January 2023 has fallen to 2.3 percent from 4.2 percent in February, according to data compiled by Bloomberg. Moody’s ranks Telecom Italia one level below investment grade at Ba1 and S&P Global Ratings an equivalent BB+.

“The ECB needs to signal that it means business,” said Stefan Isaacs, a London-based fund manager at M&G Investments, which oversees more than 245 billion pounds ($357 billion) of assets. “Maybe buying Telecom Italia bonds is just one of the ways it can do that. It’s not just starting with the highest-quality assets.”

The ECB bought other notes from Europe’s periphery, including 10-year bonds from Telefonica SA, the biggest phone carrier in Spain, and notes issued by Assicurazioni Generali SpA, Italy’s biggest insurer, said the people who aren’t authorized to speak about the matter and asked not to be identified.

“Draghi is not being shy buying peripheral debt, which is positive given the ECB can’t afford to be too picky if it wants to make a big impact,” said Agustin Martin, head of European credit research at Banco Bilbao Vizcaya Argentaria SA. “The expectation was that the ECB would focus mainly on French and German bonds so today’s purchases could bode well for peripheral credits if this trend continues.”

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