In April of last year we said the ECB would soon end up buying corporate bonds.
We’re not sure if one year later counts as “soon” or not, but ultimately, we were proven correct when, earlier this month, Mario Draghi announced a new easing “package” that includes IG non-fin EU corporates as part of a plan to increase monthly asset purchases by €20 billion.
While our call may have been prescient given that it came 11 months ago and just one month after the ECB implemented PSPP, by the time this month’s ECB decision rolled around the market generally suspected that Draghi might take the plunge. After all, he massively disappointed in December and if the 5yr-5yr swap is supposed to be the benchmark by which success or failure is judged, well then there’s plenty more room to ease.
Just as there was no reason to believe the ECB would stop at sovereign debt when PSPP was launched last March, there’s no reason to believe Draghi will stop at IG debt going forward. There’s a kind of one-upmanship going on among DM central bankers and with his massive book full of Japanese ETFs not to mention his monetization of the entirety of JGB gross issuance, Kuroda is still the archetype against which all Keynesian craziness is measured. When judged against the BoJ, the ECB probably still has a ways to go before hitting the limits of central banker insanity and so, we think it’s entirely possible that Draghi moves into HY next.
But the reasons to believe Draghi will take the plunge into non-IG corporate credit go beyond the “MOAR is always better” line. As BofAML’s Barnaby Martin explains, the EU corporate sector’s penchant for bond buybacks may ultimately force Draghi further down the ratings ladder lest the ECB should end up entangled tender offers or else end up without enough debt to monetize.
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From BofA
One issue that comes to mind with corporate bond QE is how will the ECB address the burgeoning theme of corporate debt buybacks? As chart 7 shows, European corporates have been pursuing bond buybacks rather than share-buybacks (that latter has proven underwhelming given tax issues and political pressure).
