European Credit Spreads Unfazed as ECB Scales Back Bond Buying

(Bloomberg) -- Contracts insuring against defaults from European companies barely budged after today’s central bank press conference. 

The iTraxx Europe index of investment-grade credit-default swaps initially retreated to 44.6 basis points before returning close to 44.8 basis points, the level prevailing before the announcement, based on data compiled by Bloomberg. 

The minimal moves show investors view the European Central Bank’s remaining stimulus as enough to support credit markets at a time when the economy is strengthening out of the pandemic. 

The central bank said on Thursday that it will conduct purchases under its pandemic emergency purchase program at a “moderately lower pace.” The pace of the asset purchase program, which has been active in the euro corporate bond market since 2016, will continue at 20 billion euros per month.

“There would have been some fears over a more hawkish announcement coming into today,” said Mohammed Kazmi, a portfolio manager at Union Bancaire Privee, which oversees 161.1 billion Swiss francs ($175.62 billion). “Credit should perform well in this environment given the knowledge that both PEPP and APP purchases are available to support spreads, at a time when corporate fundamentals have also been improving.”

Before the meeting, there was some concern that the ECB might be more hawkish on policy in the face of faster inflation. Instead, the outcome seems to have eased some nerves and reinforced a belief that the central bank will be supportive. 

For Kamil Amin, a strategist at UBS Group AG, the outcome was in-line with expectations for a “dovish ECB taper.” He sees a muted impact on spreads from the ECB’s decision.

Risk premiums in investment-grade bonds have remained near levels of about 84 basis points since mid-April, based on Bloomberg indexes.

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