According to Andrew Bosomworth, PIMCO’s Head of German Portfolio Management, as expected, the main elements of the ECB’s easing package focused on providing liquidity to a real economy through additional term-financing operations at subsidized interest rates as well as supporting overall aggregate demand through additional net asset purchases while deemphasizing reducing policy rates.
Leaving the deposit facility rate unchanged at -0.5% implicitly reflects that the Governing Council acknowledges the limited effectiveness of rate cuts below current levels.
The ECB will seek a strong contribution from the private sector purchase programme when it implements the additional asset purchases suggests a tilt in the purchases toward corporate bonds. The initial reaction in the credit markets was negative, however, with spreads widening further, underscoring both the high expectations placed on the ECB as well as the fragility of the current market environment.
On the other hand, Frank Dixmier, Allianz Global Investors’ Head of Fixed Income, said about the ECB’ meeting held today that the ECB President was clear in her message: the ECB is not in the front line of defense in this crisis, which is, according to her analysis, first a supply shock, then a demand shock, accompanied by financial instability. According to Christine Lagarde, the response must therefore be first and foremost fiscal.
The markets were disappointed and fell as soon as the press conference was held: spreads widened, particularly in the Italian 10-year government bond, by 25bp.
This message, which is difficult for the markets to hear, is nevertheless in line with Allianz Global Investors’ analysis of the situation. And the measures announced seem very credible to us, as they are aimed at supporting companies through various mechanisms: providing liquidity via TLTROs, a temporary EUR 120 billion increase in asset purchases aimed at the private sector. Support for the Investment Grade credit market should be strong: the purchase of credit securities, the CSPP, is currently EUR 3 to 4 billion per month. If the entire new envelope is allocated to the private sector, three times that amount will support businesses. This should cover almost the entire Investment Grade issuance market, of around EUR 16 billion per month. In addition, smaller companies will also be supported through TLTROs, with more favorable terms and strong incentives for banks to lend.
Despite some clumsiness on the part of Christine Lagarde in her communication, in particular when mentioning that the ECB is not there to deal with spreads, it should be noted that the measures announced are convincing