Strategic bond managers have suggested rumoured plans of corporate bond purchases by the European Central Bank (ECB) would be ineffective in curing the eurozone’s ills.
Last week, rumours arose that the ECB may soon expand its bond-buying programme – currently limited to covered bonds and asset-backed securities – to include debt issued by investment grade companies.
While the ECB quickly moved to deny this, bond managers interpreted the news as the ECB testing the water.
The European bond market reacted positively, with bond values rising and yields falling across the investment grade credit rating spectrum.
John Pattullo, co-manager of the Henderson Strategic Bond fund, said the market “rallied heavily on the rumours”, in particular synthetic bond indices, which “screamed up”.
“It looks like an inevitability and the market is now pricing it in,” he added.
Strategic bond managers said that, while the ECB’s actions may be supportive for the corporate bond market, they are likely to have little impact on the eurozone economy and broader market conditions.
Rod Davidson, head of fixed income at Alliance Trust, said the impact would be limited because “there isn’t much liquidity in that market”, adding that it could actually have a “negative effect”.
Mr Pattullo said although the ECB buying up corporate debt was likely to be “pretty positive” for the European bond exposure in his own portfolio, he was “not convinced this will be hugely effective” in boosting growth or tackling the threat of deflation.
The ECB has publicly stated it is looking to increase the size of its balance sheet by ¤1trn (£789bn) in an effort both to stimulate the economy and weaken the euro against other major currencies.
However, the managers pointed out that even if the ECB expands its purchasing programme to include corporate bonds, it will still not be enough to reach that goal because the size of the European corporate bond market is only approximately ¤500bn.
Sandra Holdsworth, fixed income investment manager at Kames Capital, said the impact on the corporate bond market was unlikely to be significant because “there is plenty of confidence in the corporate bond market [and] the market is very well supported”.
She said the ECB would probably only buy the higher-rated parts of the market, when the areas which truly need support would be lower-rated companies in peripheral countries such as Greece.
Managers suggested the ECB would have to resort to outright quantitative easing (QE) – the buying of sovereign government bonds – to fulfil its monetary policy goals.
Ariel Bezalel, manager of the Jupiter Strategic Bond fund, said: “Ultimately, we think the ECB will need to engage in more QE, but fear they will end up acting too late to stem deflationary forces.”
Mr Pattullo said buying corporate bonds was “another positive step on the long road to full quantitative easing”.
Just when you thought it was safe to go back into Europe...
The eurozone crisis that crippled world markets in 2011 may not be finished, according to a new report from Standard & Poor’s.
The Eurozone Crisis Is Still Not Over Yet claimed the world has entered “a new phase in the lingering eurozone crisis”.
Its author, credit analyst Moritz Kraemer, declared “the eurozone’s problems are still unresolved” and said the successful actions of ECB president Mario Draghi to introduce calm and support to markets “have instilled a sense of policy complacency” in governments.
The report said: “With long-term government bond yields having declined to historic lows, some governments have deferred the necessary but politically unpopular structural supply-side reforms aimed at enhancing their economies’ unrealised long-term growth potential.”
Mr Kraemer said recent market volatility seemed to have focused governments’ minds more on the necessary reforms, adding “how governments react to the current volatility and economic slowdown will be important determinants for the eurozone’s future direction”.
This month, S&P downgraded the credit rating of Finland from AAA to AA+, leaving Germany and Luxembourg as the last top-rated economies in the region.
It also downgraded its outlook for France to ‘negative’, which means that if economic conditions there do not improve then S&P will downgrade the country’s AA rating.
