Corporate debt gets even cheaper as ECB launches next phase of quantitative easing
The cost of borrowing for big companies in the Eurozone nudged down today as the European Central Bank (ECB) launched its corporate bond-buying programme.
From today, investment grade non-financial corporate debt is eligible to be included in the ECB’s €80bn (£63bn) a month quantitative easing package. Analysts suggest the Bank will try to buy between €5bn – €10bn in corporate debt every month as it extends its balance sheet to a new record high.
This morning, the ECB started buying up corporate debt of telecoms, utilities and insurance firms. Bloomberg reported that bonds issued by European giants such as Telefonica, Siemens, Renault and InBev had been snapped up, though the ECB did not confirm specifically what market operations were being undertaken.
However, it all began with a whimper, not a bang, as many of the effects had already been priced into the market.
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Since the programme was announced in March there have been a number of new issuances across the Eurozone and average yields – the cost of borrowing for the companies or rate of return for the investors – have dropped by 0.3 percentage points to below one per cent.
In March, Eurozone companies – some of whose bonds were bought by the ECB today – issued around €19bn in net new debt, more than double the monthly average since the creation of the euro and the strongest single month on record.
The effect the ECB had on corporate bond issuance is clearly more noticeable. pic.twitter.com/byorg7OD5F
— Jon Sindreu (@jonsindreu) June 2, 2016
“While the ECB’s corporate bond purchases seem to have had a positive effect so far,” Jack Allen, European economist at Capital Economics said, “they are unlikely to materially impact the outlook for economic growth and inflation.”
Adam Laird, senior analyst at Hargreaves Lansdown added: “Overall it’s still quite calm out there – we’ve not seen substantial movements in any of the major products.”
“The ECB, as a large price-insensitive buyer, should put a floor under prices and drive bond yields down further,” Jasper Lawler of CMC markets said.
“However, if the experience of the ECB’s other asset purchase programmes is anything to go by, the duration of the price rise may only be a matter of weeks.”
The price – which moves inversely to the yield – of Eurozone’s largest exchange-traded corporate bond fund rose by 0.14 per cent yesterday, but is up more than 2.5 per cent since plans of the scheme were first announced by ECB president Mario Draghi in March.