Draghi Distortion: How 1,000 Corporate-Bond Buys Upended Market
Mario Draghi’s patronage of corporate bonds has been a boon for issuers
(Bloomberg) -- Mario Draghi’s patronage of corporate bonds has been a boon for issuers -- but put investors in the path of an 800-pound gorilla.
The European Central Bank is on the cusp of owning a milestone 1,000 securities, having amassed 998 bonds with a value of more than 100 billion euros ($119 billion) since it started buying credit in June 2016, a Bloomberg analysis of ECB data shows.
While that’s a small slice of the approximately $1 trillion European corporate debt outstanding, the central bank’s rapid accumulation overseen by ECB President Draghi has redrawn both the credit-quality hierarchy and the market’s tolerance to selloffs.
Here are some of the ways the ECB’s bond-buying program has been felt across markets:
‘Painkiller’
For borrowers, things have rarely been so good. They’re enjoying the lowest yields on record while pushing up average deal sizes.
The ECB’s Corporate Sector Purchase Programme (CSPP) has also blunted the yield spread between investment- and speculative-grade debt. Despite ups and downs, as bond buying has intensified the trend has been clear and the differential has become ever smaller.
Meanwhile, the adjustable nature of the program has handed the ECB a tool to potentially help mitigate unfavorable market conditions.
During a mid-year global selloff -- sparked in part by central bankers expressing optimism the world can withstand tighter financial conditions as growth picks up -- allocations of new issues to the ECB jumped to a record 21 percent, according to estimates by Bank of America Corp. analysts in an Aug. 10 research note.
“The policy has become the ultimate painkiller for the Euro credit market, in our view, thanks to Draghi’s ability to buy in primary,” strategists led by Barnaby Martin wrote.
The impact of the ECB’s corporate bond buying is most obvious when you compare companies eligible for the program to ineligible peers. Being able to sell bonds to the ECB has allowed issuers to save as much as 120 basis points on borrowing costs, according to the Bank of America research.
No Return
For investors, the results are less convincing. While ECB purchases may have helped cushion bond prices from some market turbulence, they’ve compressed premiums to unprecedented levels and forced buyers further down the risk spectrum. Money managers have lapped up issuance from borrowers including Ba3-rated Ivory Coast as they strive to meet return targets.
In fact, last month the yield on debt issued by European junk-rated companies traded in line with that of U.S. Treasuries for the first time on record.
Perhaps the good news for investors is that Draghi’s largesse won’t last forever. Almost half of the 107.3 billion euros of corporate bonds it owns mature over the next five years, Bloomberg analysis of ECB data shows.
And, long before then, the central bank is expected to scale back its purchase program. Traders will be analyzing comments from the ECB chief on Thursday for any clues on the timing of its taper.
To contact the reporters on this story: Cecile Gutscher in London at cgutscher@bloomberg.net, Simon Ballard in London at sballard20@bloomberg.net, Paul Cohen in London at pcohen10@bloomberg.net.
To contact the editors responsible for this story: Hannah Benjamin at hbenjamin1@bloomberg.net, Cecile Gutscher, Samuel Potter