Fixed Income  

Managers wary of ECB corporate bond bonanza

Managers wary of ECB corporate bond bonanza

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.

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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.