(Reuters) - Any extension of the European Central Bank's asset-purchase scheme to include company debt risks running into a familiar problem - the ECB may not being able to buy enough of them to make a difference.
A wave of enthusiasm spread over financial markets on Tuesday after Reuters reported, citing sources close to the situation, that the ECB might decide as soon as December to start buying corporate bonds to complement its covered bonds and asset-backed securities purchase program.
But those who own the bonds may not want to sell them, and bond market participants and analysts say a shortage of bonds to buy would make the scheme more symbolic than substantive. It could also highlight the ECB's difficulties in pressing ahead with more contentious plans to buy sovereign debt.
Some even think the corporate bond-buying scheme, intended to revive growth and stave off deflation, could do more harm than good. "Our advice - don't do it," said Suki Mann, head of European credit strategy at UBS.
The ECB says its Governing Council has not decided to buy corporate bonds. It has previously stated, though, that its aim is to bring its balance back to levels last seen in 2012, to unclog credit channels and stimulate lending to the real economy.
Its balance sheet reached around 3 trillion euros in early 2012 and stands at around 2 trillion now. Yet it appears to be struggling to find ways to spend this newly printed money. Rabobank analysts predict that the ECB will only be able to buy around 100 billion euros of covered bonds and ABS, a tenth of the stock the ECB says is eligible for purchase.
Economists polled by Reuters predict 250 billion euros of purchases.. Corporate assets eligible as collateral for the ECB's existing bank lending operation stood at 1.4 trillion at last count. But analysts think the total amount it could buy in a direct purchase scheme would be much smaller.
Bank estimates for the pool of corporate bonds likely to be eligible - stripping out those with very short maturities, foreign currencies or issuers and junk ratings - range from 700 billion to 1.1 trillion euros. It would need to buy nearly all of that to hit its balance sheet target. Investors say in reality it will be able to buy few.
"The bonds are held currently by the vast number of fund managers and insurance companies that need to hold corporate bonds, and the ECB is going to struggle to suck a lot of those bonds out unless they pay considerably over the market price," said Adam Cordery, head of euro fixed income at Santander Asset Management.
"BROKEN" MARKET
Even with record low borrowing costs and ample demand, many companies have little appetite for debt-funded expansion with the threat of a triple-dip recession on the horizon. Bond redemptions have outpaced issuance in the investment-grade corporate bond markets this year, as they have in broader credit markets. That has left a wealth of investors competing for limited supply.
This has exacerbated a problem in secondary markets, where a lack of trading prompted the world's biggest asset manager, BlackRock, to label the corporate bond market "broken" in a note to clients last month. One of the few historical examples that strategists point to for the ECB's potential expansion into corporate bonds is the UK.
In 2009, the Bank of England started buying corporate bonds, but its total purchases peaked at 1.5 billion pounds - or just 0.6 percent of the market. Even if the ECB does find bonds to buy, strategists are worried that all it may serve to do is further inflate a credit bubble as investors are forced into riskier debt to meet yield targets.
As the Reuters report broke on Tuesday, the main euro zone corporate credit index dropped to its tightest level in nearly two weeks, peripheral euro zone government bond yields tumbled and European stocks were put firmly on course for their best week in a year.
"The credit market is already intoxicated on the drug called negative net supply, and the addictive quest to compensate low rates," said Jeroen van den Broek, a credit strategist at ING.
"The ECB entering the fold would see investment mandates stretched even further to find elusive yield and homework on credit being ignored further."
Analysts are also trying to work out whether this is a prelude to the kind of sovereign bond-buying that could meaningfully increase the ECB's balance sheet, or evidence that such a program is far from certain.
German Chancellor Angela Merkel is struggling to contain a public backlash to ECB president Mario Draghi's ever-expanding toolbox of unconventional policies. Sovereign bond purchases - which German plaintiffs to Europe's top court say violates a ban on ECB funding of governments and exceeds its mandate - may prove a step too far.
"The ECB's foray into buying corporate bonds could be a sign that the there remains considerable opposition to government bond QE within the Governing Council," said Abhishek Singhania, European interest rate strategist at Deutsche Bank.
reuters.com
A wave of enthusiasm spread over financial markets on Tuesday after Reuters reported, citing sources close to the situation, that the ECB might decide as soon as December to start buying corporate bonds to complement its covered bonds and asset-backed securities purchase program.
But those who own the bonds may not want to sell them, and bond market participants and analysts say a shortage of bonds to buy would make the scheme more symbolic than substantive. It could also highlight the ECB's difficulties in pressing ahead with more contentious plans to buy sovereign debt.
Some even think the corporate bond-buying scheme, intended to revive growth and stave off deflation, could do more harm than good. "Our advice - don't do it," said Suki Mann, head of European credit strategy at UBS.
The ECB says its Governing Council has not decided to buy corporate bonds. It has previously stated, though, that its aim is to bring its balance back to levels last seen in 2012, to unclog credit channels and stimulate lending to the real economy.
Its balance sheet reached around 3 trillion euros in early 2012 and stands at around 2 trillion now. Yet it appears to be struggling to find ways to spend this newly printed money. Rabobank analysts predict that the ECB will only be able to buy around 100 billion euros of covered bonds and ABS, a tenth of the stock the ECB says is eligible for purchase.
Economists polled by Reuters predict 250 billion euros of purchases.. Corporate assets eligible as collateral for the ECB's existing bank lending operation stood at 1.4 trillion at last count. But analysts think the total amount it could buy in a direct purchase scheme would be much smaller.
Bank estimates for the pool of corporate bonds likely to be eligible - stripping out those with very short maturities, foreign currencies or issuers and junk ratings - range from 700 billion to 1.1 trillion euros. It would need to buy nearly all of that to hit its balance sheet target. Investors say in reality it will be able to buy few.
"The bonds are held currently by the vast number of fund managers and insurance companies that need to hold corporate bonds, and the ECB is going to struggle to suck a lot of those bonds out unless they pay considerably over the market price," said Adam Cordery, head of euro fixed income at Santander Asset Management.
"BROKEN" MARKET
Even with record low borrowing costs and ample demand, many companies have little appetite for debt-funded expansion with the threat of a triple-dip recession on the horizon. Bond redemptions have outpaced issuance in the investment-grade corporate bond markets this year, as they have in broader credit markets. That has left a wealth of investors competing for limited supply.
This has exacerbated a problem in secondary markets, where a lack of trading prompted the world's biggest asset manager, BlackRock, to label the corporate bond market "broken" in a note to clients last month. One of the few historical examples that strategists point to for the ECB's potential expansion into corporate bonds is the UK.
In 2009, the Bank of England started buying corporate bonds, but its total purchases peaked at 1.5 billion pounds - or just 0.6 percent of the market. Even if the ECB does find bonds to buy, strategists are worried that all it may serve to do is further inflate a credit bubble as investors are forced into riskier debt to meet yield targets.
As the Reuters report broke on Tuesday, the main euro zone corporate credit index dropped to its tightest level in nearly two weeks, peripheral euro zone government bond yields tumbled and European stocks were put firmly on course for their best week in a year.
"The credit market is already intoxicated on the drug called negative net supply, and the addictive quest to compensate low rates," said Jeroen van den Broek, a credit strategist at ING.
"The ECB entering the fold would see investment mandates stretched even further to find elusive yield and homework on credit being ignored further."
Analysts are also trying to work out whether this is a prelude to the kind of sovereign bond-buying that could meaningfully increase the ECB's balance sheet, or evidence that such a program is far from certain.
German Chancellor Angela Merkel is struggling to contain a public backlash to ECB president Mario Draghi's ever-expanding toolbox of unconventional policies. Sovereign bond purchases - which German plaintiffs to Europe's top court say violates a ban on ECB funding of governments and exceeds its mandate - may prove a step too far.
"The ECB's foray into buying corporate bonds could be a sign that the there remains considerable opposition to government bond QE within the Governing Council," said Abhishek Singhania, European interest rate strategist at Deutsche Bank.
reuters.com
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