On Wednesday, the European Central Bank (ECB) began to buy corporate bonds (CSPP). Unlike the sovereign debt market, the impact on the corporate debt market’s liquidity cannot be directly measured. As has been said before, the percentage of purchases by issuer is clearly defined based on the capital key of each country in the ECB.
The monthly volume of purchases is also well defined, so the variation in market liquidity can be deduced with a very slight margin of error from the debt maturity data and the deficits to be financed over the year by each sovereign state.
Afi’s estimation of the effect of the ECB’s purchase of public debt (at maturity), or the absorption of liquidity in the market, is around 620 billion euros in 2016. This figure is the result of a net issue of around 140 billion euros and purchases totalling 760 billion for the year as a whole. The potential (downward) impact on interest rates is significant, and Afi’s current forecasts put it close to 40 basis points on the IRR of the German 10-year bund (see their Daily Report of 22 April 2016).
On the other hand, in the corporate bonds segment, Afi experts say various elements make it difficult to come up with similar estimates on the absorption of liquidity in the market. On the one hand, it is difficult to quantify the volume of monthly purchases the ECB is going to make. In fact, Draghi himself said during the press conference after the last Council Meeting that the current design of the different asset purchase programmes gives the central bank enough flexibility to adapt to market conditions. According to Afi’s estimates, the average volume of monthly purchases could be between 5 billion and 10 billion euros. (See their report of 11 March 2016).
Furthermore, Afi highlights that the net issue of corporate debt is a much less predictable variable than that of sovereign bonds. In fact, since the CSPP was announced in March, the increase in the volume of the gross issue of non-financial investment grade corporate debt in the euro area has been significant: of the almost 100 billion euros issued in the year to date, 90% has been placed since March, at a rate of 26 billion euros a month.
If a similar pace is maintained, and assuming that the ECB purchases 7 billion euros a month, the rise in the amount of “available” bonds in circulation in the European corporate fixed income market could be around 70 billion euros from now until year-end. As a result, the downward pressure on rates and spreads could marginally decrease, Afi says.
