Dissecting ECB corporate bond purchases
Following the ECB’s announcement in March that it will accelerate stimulus measures by purchasing corporate bond, the central bank now revealed details of the first round of purchases conducted in June, but the report leaves fixed income investors confused.
The first round of the ECB’s Corporate Sector Purchase Programme (CSPP), conducted in the second week of July, amounted to a total of €10.43bn, with 458 corporate bonds being acquired.
Prior to conducting the purchases, the ECB pledged to buy only Euro denominated investment grade bonds issued by companies incorporated in the eurozone, this also includes companies with a parent outside the eurozone, such as US, UK or Swiss firms.
However, the report back of the first round of purchases has left fixed income investors, confused. With the execution of purchases being left in the hands of the national central banks of individual eurozone countries, reporting standards are far from consistent.
While the Deutsche Bundesbank lists each benefiting company including its ISIN number, most central banks, including the Belgian, Italian and Spanish central banks only publicise the ISIN numbers of the companies which benefited from ECB purchases. The French central bank does not publicise any details but simply refers investors to Bloomberg data.
Moreover, while the total amount of purchases has been disclosed, the ECB has not revealed the weighting of its investments, making it impossible to derive any conclusions about its risk exposure to individual companies as Wolfgang Bauer, deputy fund manager of the M&G Global Corporate Bond Fund and European Corporate Bond Fund points out.
Dissecting the figures, he argues: “We can apply basic percentile analysis to get a better understanding of the ECB’s corporate bond holdings. The median asset swap (ASW) spread and median yield to maturity (YTM) of the CSPP holdings are 20 bps and 14 bps, respectively. In comparison, the corresponding median values of the EUR-denominated investment grade (IG) non-bank index, a crude proxy for the eligible bond universe, are both above 30 bps. The middle 50% of CSPP spread and YTM values (i.e., from the 25th to the 75th percentile) are less dispersed and shifted to lower values, compared to the index.”
Bauer also highlights that more than a third of bonds acquired under the programme are currently trading at negative yields to maturity, suggesting that the ECB holdings could be more defensively positioned than investment grade indices.
In terms of country allocation, Bauer highlights that although French companies have relatively more ECB eligible debt than German firms, both countries appear to be equally represented, with 26.6% of purchases being conducted among German firms and 25.3 among French firms (see figure).
Stephen Thariyan, head of Global Credit at Henderson adds: The ECB’s CSPP programme has been strong, it was extimated at €5bn a month, it is coming now up to twice that, in an asset class that has limited liquidity anyway, they have added to the problem. But those bonds are rallying, people are positioning themselves in terms of owning similar types of bonds, they will have security that there is a buyer of last resort. So the programme has been effective but it has been part and parcel of lots of Central Bank action like buying assets or promoting these through QE. So, it’s been effective, but it does add to the liquidity issues we have in our markets.”