ECB’s Pandemic Bond Buying Opens Up New Trade for Investors

(Bloomberg) -- The European Central Bank’s most aggressive bond-buying program ever is opening up a new opportunity for investors -- buy debt without so-called collective action clauses.

The ECB’s new 750-billion-euro ($810 billion) Pandemic Emergency Purchase Programme is free of restrictions similar to those on its previous quantitative easing plans. Chiefly, the PEPP casts aside limits on the amount of a single bond, or of the same issuer’s debt, that the institution may hold.

That means the ECB can now in theory become the key creditor to any single borrower. But the institution may prefer to avoid being the dominant owner of bonds issued after 2013 as they come with CACs, which allow a super majority of holders to override minority peers’ ability to block restructuring plans.

“The ECB will try to avoid being in the position of a potential blocking minority as much as possible,” Kevin Ferret, a strategist at Societe Generale SA, wrote in a note. “With the scarcity of purchasable bonds in some jurisdictions, it would probably favor non-CAC bonds versus CACs, even if the restructuring risk is low.”

Given that prospect, sustained ECB buying of the region’s securities could create increased distortions between bonds with CACs and those without, he said. The ECB bought 30.2 billion euros of bonds in the first week of the operation.

SocGen recommends buying securities without such clauses in Germany, where the ECB is particularly constrained due to a scarcity of outstanding debt. In Italy though, it is safer to buy those with CACs, due to the risk of restructuring, according to the bank.

German 10-year yields rose two basis points to -0.42% as of 3:09 p.m. in London. Those on Italy dropped six basis points to 1.49%.

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