In what could be the most market disruptive intervention to date, today the European Central Bank (ECB) begins their Corporate Sector Purchase Programme (CSPP); meanwhile German 10-year bund yields touched new record lows of 0.034% (though have “nearly doubled” since) and around 15% of euro corporate investment grade debt is already in negative yield territory. The ECB first announced it would include corporate sector purchases to the Asset Purchase Programme (APP) on March 10 and details of the CSPP were released at the end of April, but markets have yet to find consensus as to how large and how effective this extreme measure will be in pushing inflation closer to the target of “below but close to 2%”.
The estimated eligible market size is around €650bn covering all sectors excluding “credit institutions” and includes issues that are effectively investment grade (above step 3/BBB-/Baa3) at purchase with maturities between 6 months and 31 years. Given that this programme is expected to continue for at least a year there is obviously an upper limit on how much the ECB can buy each month before they significantly disrupt market functionality. For example a €10bn per month programme would see them acquire a fifth of the outstanding market within 12 months.
Although the stated maximum issue share limit is as high as “70% per international security identification number (ISIN)” (and lower for “public undertakings”) the ECB have clarified that, “Its participation in primary market purchases will aim at striking a balance between the objective of the programme and the need to ensure continued market functioning. Similarly, when buying in the secondary market, it will consider, inter alia, the scarcity of specific debt instruments and general market conditions”. As such the purchases will likely be in the (still sizable) range of €3-6bn per month.
Of course if things work out, another intended consequence of the programme is to incentivise Eurobond issuance drawing funding away from the dominant dollar market and finally making the Euro an equivalent alternative to dollar denominated borrowing. Indeed, this has already begun to happen with issuance of €21.7bn and €19.7bn in April and May (following the announcement) both over double the issuance compared to January. Cheaper funding for investment grade will not only support top companies but will include many smaller companies also, and of course create a trickledown effect as creditors eager for higher returns are jostled further down the credit curve supporting those not directly eligible for ECB purchases. Such a hyped environment for borrowing could see the “euro corporate bond market double within five years” according to a quote in the Financial Times.
We’ll all have to wait until Monday 18th July before the ECB began publishing the names of their purchased securities which they will continue to disclose on a weekly basis. The size of their holdings will however remain confidential and counterparts engaged in selling to the ECB are disallowed from disclosing their trades. Expectations are for almost 70% of the initial purchases to be concentrated in France Netherlands and Germany alone with Italy also likely to receive around 10% of the purchases which will ease pressure on its unfixed structural debt problem. Peripheral countries will still have to hope that sufficient efficiency in the transfer mechanism stems their rising funding costs; as all involved hope such extreme measures distract markets from concerns that the Eurozone is running out of inventive ways to support their economies with monetary policy.