Credit managers are wary of the unintended consequences of the European Central Bank’s (ECB) corporate bond-buying programme after it revealed further details of how it will enter the market.
The ECB has announced it will expand its quantitative easing (QE) programme to include non-financial investment-grade euro corporate debt. The move sent a flock of investors into the space in anticipation, driving spreads down and further encouraging issuers to become involved.
But, while tighter spreads have been welcomed by corporate bond managers, they have also highlighted a number of uncertainties created by the arrival of a dominant buyer.
Resultant dislocation could create an opportunity for active managers, according to James Foster, manager of the Artemis Strategic Bond fund.
“There are a quite lot of unknowns about how [the ECB] implements the programme and potential confusion as there are six central banks conducting this.
“The element of confusion when one bank does one thing and another bank does another could create some anomalies.”
Mr Foster also pointed to potential downsides.
Corporates on the border between investment grade and high yield now have an “advantage” to remain in the former category. BBB-rated companies will likely cut dividends, partake in capital sales and reduce gearing to do so, he suggested.
“The primary concern is that there is an enormous amount of buying coming that’s focused entirely on investment grade.
“Investors hunting for yield and who are really struggling to get an income, will now go further down the risk spectrum. You can argue whether that’s a good or bad thing but that’s exactly what QE is trying to do.”
| ECB corporate bond-buying programme: The details |
On March 10 the ECB announced an extension to its QE programme, increasing monthly purchases from €60bn to €80bn, and including non-financial corporate debt for the first time. The central bank has not confirmed the targeted amount of corporate debt purchases, but market estimates centre on a figure of €5bn a month. Similarly, policymakers have not specified an end-date for their purchases. But they have since stated the programme will start towards the end of the second quarter, target maturities from six months to 30 years, and encompass bonds rated BBB- and higher. Notably, the ECB said it will be able to buy up to 70 per cent of a single bond issue. Pioneer Investments head of European fixed income Tanguy Le Saout said the scope of the bonds eligible for the programme was more wide-ranging and flexible than expected. He said this should help sustain the recent rally in spreads. The absence of a fixed target was understandable, he added, as it will allow the ECB to avoid market disappointment. |
TwentyFour Asset Management portfolio manager Gordon Shannon said the arrival of a large new buyer could end up damaging liquidity, given the lack of existing secondary market trading and the fact that institutional buyers are holding on to their stock of debt in anticipation of spreads tightening further.
Mr Foster added: “Buying bonds in a market that’s illiquid anyway, and potentially buying up to 70 per cent of any issue, is having a dramatic impact.”
Felix Freund, manager of the SLI European Corporate Bond fund, said bonds being bought by the ECB would end up becoming more defensive assets, creating a gap between these and other debt.
“It will be harder to buy eligible bonds in the secondary market but easier to sell them, so some market participants can recycle them to the ECB. These bonds will become a lot more defensive and less volatile, which means a differentiation between the eligible bonds and non-eligible bonds,” he said.
One aspect of the programme that managers think might change the shape of the bond market is the ECB’s confirmation that it will purchase debt irrespective of an issuer’s domicile.
Mr Foster said he expected non-European firms to obtain a listing in countries such as Luxembourg to take advantage of the ECB’s intervention.
“Given the scale, it will increase issuance and reduce yields,” Mr Foster said.
Mr Freund added: “We expect more [issuance] from the corporate sector, overseas and non-eurozone domiciled corporates from the US. These global firms look at the European market and it’s the cheapest. So there will be increased issuance, but not necessarily from eurozone firms.”
But the managers also questioned how much more impact the ECB’s plan will have, given the spread tightening that has already happened in anticipation of its move.
“We have already seen a pretty dramatic effect on markets,” Mr Shannon said. “I wonder how much of a flurry we will have when the ECB starts buying... it’s the old adage ‘buy the rumour, sell the fact’.”
