ECB's Corporate Bond Buying Program Starts - BBH

ECB's Corporate Bond Buying Program Starts - BBH

7 June 2016, 06:45
Roberto Jacobs

ECB's Corporate Bond Buying Program Starts - BBH

Research Team at BBH, suggests that the ECB’s corporate bond buying program begins this week in which ECB will buy euro-denominated, investment grade bonds from companies incorporated within the Eurozone.

Key Quotes

“The ECB will purchase bonds that mature in six months to 30 years. Bank bonds are specifically excluded from the ECB's purchase program, but insurance companies are included. 

The ECB is relying exclusively on the secondary market for its purchases of sovereign and agency bonds.  The corporate bonds will be purchased in the primary and secondary markets. 

It is not immediately clear how much corporate bonds the ECB will buy.  The increase 20 bln euro increases in purchases the ECB announced in March are not expected to be fully accounted for by corporate bonds.  That would seem to suggest the ECB is not as concerned as some investors about running out of eligible paper.  Given various considerations about the size of the European corporate bond market and of individual issues, most estimates suggest a range of 5-10 bln corporate bonds a month may be bought.  We suspect the upper end of the range may be difficult to achieve on a sustained basis.  

Impact of the ECB's corporate bond purchases: There have already been two responses.  First, the yields on corporate bonds have fallen in relative terms (to sovereign yields).  Second, there has been increased issuance of corporate bonds.  In addition to the corporate bond purchases, the ECB will also launch another round of targeted long-term repo operations (TLTRO) can banks can secure cheap, and possibly negative yielding funds, from the ECB to lend to households and companies.  ECB corporations may use the cheap funding for merger and acquisitions and share buybacks.  

Although no European corporate bonds have been issued at negative rates, as some corporate bonds get close to maturity, negative yields have been seen in the secondary market. Some industry estimates suggest that around 40 bln euro of corporate paper have negative yields (vs. negative yield on several trillion euros of sovereign bonds).  Negative yielding corporate paper, which meets the other criteria, can be bought by the ECB provided the yield is not less than the deposit rate (minus40 bp).

Impact on US corporate bonds:  US corporate bond issuance has increased, and the premium over Treasuries has fallen.  Foreign investors have been moving into the US corporate bonds market.”


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