ECB Commercial Paper Purchases Wane With Focus Shifting to Yield

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An emergency program backstopping short-term liquidity for companies during the pandemic is facing obsolescence just a year after its launch as the European Central Bank’s focus turns to the threat of rising bond yields.

The ECB’s holdings of commercial paper have shriveled to just a third of their peak last May, shrinking to 12.8 billion euros ($15.2 billion) in the February-March period, according to data published by the ECB Wednesday. By contrast, holdings of longer corporate bonds kept rising to 27.1 billion euros.

The pivot to longer-maturity debt shows how much conditions for companies have improved since the pandemic first wreaked havoc in credit markets a year ago and also how the ECB’s priorities have evolved. The central bank has shifted from having to ensure essential liquidity for struggling firms to preventing a rapid rise in yields as economies led by the U.S. emerge from pandemic crisis mode, lifting inflation expectations.

“Liquidity intervention is like emergency medicine: hard and fast,” said Marco Stoeckle, head of corporate credit research at Commerzbank AG. “Back then it was key. Now the ECB is clearly focused on assuring favorable financial conditions.”

ECB Commercial Paper Purchases Wane With Focus Shifting to Yield

The shrinkage in the ECB’s commercial paper holdings was becoming clear by last summer. However, they still remained big enough to make it hard to say for sure that the decline had become a definitive trend, said Stoeckle.

Priority Purchases

Companies, which issue commercial paper for essential expenses like payrolls and inventory, had pushed the ECB to make purchases of commercial paper a priority. Carmaker Volkswagen AG and Iberdrola SA, a Spanish utility, were among large corporations urging the ECB to buy up the short-term debt as quickly as possible.

The dash for liquidity that followed, as companies rushed to lock in cheap borrowing costs with longer bond sales, reduced the importance of the commercial paper backstop and holdings at both the ECB and the Bank of England subsequently declined.

However, the ECB is not looking to scale down its overall intervention any time soon. President Christine Lagarde last month pledged to boost the pace of bond purchases to contain rises in bond yields.

The ECB’s focus now is “making sure that they do not under-deliver on their narrative of stepping up purchases,” said Shanawaz Bhimji, a fixed income strategist at ABN Amro Bank NV.

©2021 Bloomberg L.P.

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