22nd March 2016

ECB and corporate bonds

MARKET CLOSE:
FTSE 100
6,285, -5
DAX
9,949, -2
S&P 500
2,052, +2
iTraxx Main
71bp
iTraxx X-Over Index
298bp
10 Yr Bund
0.23%, +2bp
iBoxx Corp IG
B+155bp, -1bp 
iBoxx Corp HY Index
B+539bp, -4bp
10 Yr US T-Bond
1.92%, +4bp

How much CAN they buy?… Much has been said and calculated as to how much of the corporate bond market the ECB could buy/get their hands on. Fear not. We wonder how much thought they really put into the effort. Let’s take a look at the new issue market first. The ECB can buy an extra €20bn a month through the asset purchase scheme. IF they went for it in the new issue market, they would take out all the annual supply (€250bn being the average issuance in IG non-financials for the past four years). That’s unrealistic and also includes non-eurozone domiciled borrowers (20-30% of the total). So what is a reasonable number? Of the €250bn of issuance, 70% is eligible for purchase (around €175bn) and they could say, lift 25% if they were aggressive. That implies €45bn of new issuances falling into the hands of the ECB (which would be €200bn short of their stated goal of an extra €240bn, at €20bn per month) with €200bn left over for third party investors. At €45bn that would imply a little under €4bn per month. Now, the covered bond programme which is the easiest to buy, is averaging approximately €2bn per month and ABS a paltry €290m! So, €4bn per month of potential corporate bond buying not only “seems” a high number, it IS a high number – and unachievable in our view. In addition, primary (largely) ought to be safe from the ECB’s tentacles because as well as needing to do their credit work, they need a week’s notice while most corporate issuance issuance is done and dusted in a day. Admittedly, they have sub-contracted the ABS programme buying out to 3rd parties, but that has hardly been a success – averaging just €290m per month in purchases! Also, do we now have the ECB as a 1-on-1 for every roadshow?

ECB has €20bn a month to spend

If not primary, then secondary… It is in the secondary market where they could make a real difference – possibly. The total universe here is €1.55trn but their pot is whittled down to around €660bn if we take out financial debt and non-eurozone issuer bonds (€826bn minus around say 20%). Using the same technicals as before, there is absolutely no way the ECB will fill a potential €20bn monthly quota (€240bn a year) through the mightiest grabfest in corporate bond history. They would take out over 1/3 of the corporate bond market in the first year alone. They won’t. Finally – and realistically – the asset purchase programme has been expanded by €20bn per month and “can/will” include corporate bonds. We think that €2bn a month is tops that the ECB will aim for. They simply wouldn’t be able to lift more than that. That €2bn figure would amount to much noise and not a whole lot of action in reality – but enough to frustrate investors and still distort the market in favour of lower spreads which we had previously suggested, such is the perilous nature of secondary market liquidity.

Easter run-in off to a surprisingly quiet start… Just a 4-day week and it appears we’re already in long-weekend holiday mode. There was little to get our teeth into. Equities played out in a tight range, government bond markets were slightly better bid and credit edged tighter. Admittedly, iTraxx index roll-day occupied that sector of the credit market, but the session ran off with little altercation. Even primary was closed save for a benchmark deal from German building materials giant HeidelbergCement. The €1bn it raised for the HY market would also have appealed to IG investors and (even with the 7-year maturity) eventually to retail investors. The HeidelbergCement deal was priced at midswaps+205bp – and having tightened up 20bp versus the initial price talk still offered a 30bp new issue premium. Rather generous from the high double-B rated borrower. While European equities closed out unchanged to a very small down, credit ended a touch better for choice in a rather lacklustre session, the Markit iBoxx IG corporate bond index was left at B+155bp (-1bp) and that’s about the best we could say on an uneventful session. In HY, we were slightly better bid. The iBoxx index – using this as a broad measure for the high yield market – ended at B+539bp (-4bp). Slovenska HSE pulled their deal, highlighting that we haven’t quite gone into “but whatever mode” just quite yet post ECB. It will come, in time. Finally, the S25 new iTraxx index kicked-off and closed Monday at 71bp and 298bp, respectively, for Main and X-Over.

Back tomorrow.

Suki Mann

A 25-year veteran of the European corporate bond markets and in his role as Credit Strategist, Dr Mann has been ranked number one in the Euromoney Investor Survey eight times in ten years. Previously with Societe Generale and UBS, he now shares views of events in the corporate bond market exclusively here on Credit Market Daily.