What We Know About Draghi’s Coming Corporate Bond Purchases: The Winners And Losers

In our snap assessment of the ECB’s decision yesterday, we highlighted some of the key highlights: the most important part of Draghi’s monetary expansion was the inclusion of investment grade non-fin European corporate bonds, a necessary precondition to expanding QE by €20BN due to the scarcity of treasury collateral; the total €1.6 trillion universe of eligible Investment Grade bonds while sizable, is actually far less than it appears on the surface, that there is a “crowding out” danger as traders rush to sub-IG debt which may impair liquidity in the IG bond market next, and that many questions remain unresolved, such as what happens to the debt held by the ECB if it is equitized – does Draghi become an activist investor demand management changes?

One day later, there is more available information, and here courtesy of BofA’s Barnaby Martin is an expanded assessment of what the ECB’s attempt to explicitly stimulate the European credit really means.

As Martin writes, the ECB has indeed tried to extend a helping hand to the credit market, to help weaken the negative correlation between bund yields and credit spreads (-60% over the last year). As he points out, it was telling that Draghi highlighted issues such as bank bond volatility and senior bank debt maturities today. To BofA this is a sign that the ECB is aware of the deteriorating health of the credit market. Naturally, it believes that the corporate bond purchases will be a bullish tailwind for spreads (although we would expect supply to pick up meaningfully as well).

Here are the highlights from his report:

An “OMT” for credit markets in the short-term…

What of the details of corp purchases? As yet, they are very sparse. The ECB will appoint a committee to investigate the scope of buyable assets. Thus, it feels like the central bank is in the very early stages of thinking about corporate bonds. We know little about the volume of debt they intend to buy (although corps will help the ECB achieve their €80bn per month target under the expanded Asset Purchase Programme).