The European Central Bank started buying corporate bonds on Wednesday, picking up utility, insurance and telecom papers, as part of its latest effort to revive rock-bottom inflation by getting companies to borrow and spend.
Adding investment-grade euro credit to its €1.74 trillion of asset purchases, the ECB hopes to further cut borrowing costs, giving companies incentives to invest and fuel growth in the bloc that is still struggling to overcome the last stages of its debt crisis.
Traders said the ECB was active in the secondary market with one of its first inquiries for a five-year utility bond, according to IFR, a Thomson Reuters service.
Investors said the central bank appeared to be buying papers from firms such as insurer Generali and telecoms firm Telefonica with purchase sizes in the €3-5 million range.
The European Commission will consider reducing how much capital banks must hold against risk for a new class of asset-backed securities, a process of packaging and selling loans blamed for the financial crisis.
“However, I think we’ve priced in most of the price moves already,” said one syndicate manager. “Most interesting will be if we see a divergence within sectors depending on if the ECB is buying one and not another.”
Although it was not immediately clear what papers the ECB was buying, yields on one Telefonica bond fell three to six basis points on Wednesday, a relatively sharp move.
The programme will face serious obstacles. The market for such debt is worth €500-600 billion, but tends to be dominated by big companies in France and the Netherlands. They already enjoy easy access to credit, so their interest in the cheap cash may be limited.
Success will largely depend on the ECB’s ability to attract new borrowers and on cheaper borrowing costs trickling down to weaker economies like Italy’s and Spain’s, where costs remain high.
Since the ECB announced in March that it would start buying corporate bonds, issuance in the sector has surged to over €110bn, according to data from IFR.
“At this stage, the ECB itself is probably not sure how much it will be able to buy,” Deutsche Bank analyst Michal Jezek said. “For example, we could see some strong months with €9-10bn of purchases and others, such as August, with say €1-2bn, with most months somewhere in between.”
Jezek expects record euro debt issuance this year, with €250bn in gross and more than €100bn in net sales. About half the net figure will come from eurozone corporations, responding to the ECB’s purchases.
The ECB will not set purchase targets and is likely to start slow, prepared for big fluctuations and ramping up over time. It will hope to buy €5-10bn a month if it succeeds in inducing fresh issuance, sources close to the ECB have told Reuters.
If meaningful new issuance fails to materialise, volumes may be limited. Some eurozone sources argue that buys might hold between €2-3bn per month.
The ECB is buying €80bn worth of assets, mostly government debt, per month, at least until March 2017. But the failure of inflation to accelerate is expected to force the bank to extend the purchases. That would increase the risk it would struggle to find assets to buy, running into liquidity shortages or the constrains of its self-imposed limits.
Although analysts expect the ECB to be heavily involved in the primary market, its commitment to buy proportionally to outstanding issues will force it also to buy in the secondary market.
“The timing (of the start) suggests that the ECB is well aware of making the best of the purchase period ahead of the summer lull,” Morgan Stanley said in a note.
“We expect the average pace over the life of the corporate sector purchase programme to be €3-5bn per month, across primary and secondary (markets).”