2018 Outlook: ECB will remain big corporate bond buyer despite tapering
Jorgen Kjaersgaard (pictured) is head of Global Credit at AllianceBernstein.
As the European Central Bank (ECB) tapers its quantitative easing (QE) programme from €60bn to €30bn a month, the volume of corporate bonds it buys under its Corporate Sector Purchase Programme (CSPP) is expected to remain largely unchanged.
Challenges associated with the ECB’s government bond-buying criteria mean it will need to continue to turn to corporate issuance to fulfill its monthly €30bn quota. As a result, we expect ECB corporate bond purchases to be around €5bn per month this year, compared with €6-8bn per month in 2017—despite the ECB having halved its overall QE purchases.
By the time QE comes to its anticipated end in September, the ECB could be holding a €175bn corporate bond portfolio. We expect the ECB will continue to reinvest maturities after this date—and these reinvestments could amount to anywhere between €10bn and €25bn per annum.
Based on reinvestments alone, the ECB will continue to absorb a significant portion of available supply. Over the last five years, average annual net issuance of non-financial EUR-denominated investment-grade corporate bonds has amounted to around €110bn (gross issuance amounts to around €245bn). This figure is likely to stay broadly unchanged—although the market could be impacted by fewer US companies issuing EUR paper because of US tax reform: US issuers now account for more than 20% of euro-denominated investment-grade supply.
With ECB reinvestments absorbing a significant portion of the available supply in corporate bonds, investors will need to look for opportunities outside of the ECB’s scope, for instance, in selective financials and high yield.