ECB May Already Be Winding Down Its Corporate Bond Purchases

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(Bloomberg) -- The European Central Bank may have already started to taper its corporate-bond buying program, according to Deutsche Bank AG.

The rate of purchases under the Corporate Sector Purchase Programme fell 50 percent in April to about 700 million euros ($853 million) per week, down from 1.4 billion euros during the first quarter, Deutsche Bank said in a note published on Tuesday. That may mean the ECB is starting a “stealth taper” to wean the European bond market off the corporate debt purchases it began in June 2016 to prop up growth, Deutsche Bank said.

“Very little trimming has been applied to the CSPP so far and that might be a reason to start a gradual slowdown of corporate purchases a lot earlier in order to avoid too abrupt a stop,” Deutsche Bank strategist Michal Jezek, wrote. “If the weekly CSPP data release next Monday confirms this pattern, it will be hard to doubt that it is indeed what has happened.”

The ECB has purchased more than 150 billion euros of corporate debt since starting the program. After buoying the bond market over the past two years and squeezing yields, rising average borrowing costs this year suggest its impact may now be ebbing as purchases near a possible end in September.

The ECB already announced it would reduce purchases across its wider program, including sovereign, agency and covered bonds. In April last year it cut the pace of buying to 60 billion euros a month from 80 billion euros and reduced it further at the start of this year to 30 billion euros.

It may still be too early to conclude the ECB has accelerated tapering of the CSPP even if purchases have slowed because the data is volatile, according to David Powell, senior euro-area economist at Bloomberg Economics.

Wary Investors

But investors are growing wary about an imminent end to the unprecedented rally in credit driven by the program. Bonds that are eligible for ECB purchases are already showing signs of losing a key pillar of support, according to Gordon Shannon, a money manager at TwentyFour Asset Management in London.

“There is an expectation of a taper,” said Shannon, whose firm oversees 10 billion pounds ($14 billion). “Bonds targeted by the ECB have suffered just as much volatility this year as the rest of the market. Previously, you wouldn’t have seen much reaction from debt that’s eligible for the purchases even as other areas sell off.”

The ECB has also been shifting its purchases toward new-issues rather than existing secondary bonds which has less impact on yields in the broader market, according to Jeroen van den Broek, ING Groep NV’s head of debt strategy and research.

New Bonds

In March, the ECB’s holdings of new corporate bonds increased by 3.6 billion euros, equivalent to 60 percent of its purchases that month. About 2.4 billion euros of notes were purchased in the secondary market, according to a breakdown on the ECB’s website.

The average yield on investment-grade corporate bonds rose to 0.94 percent yesterday, the highest since July, according to Bloomberg Barclays index data.

“CSPP will no longer be the stabilizer and squeeze catalyst to credit spreads,” said Van den Broek. “As the tapering process happens, less people will want to be invested in credit because the big buyer isn’t really there anymore.”

©2018 Bloomberg L.P.

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